government intervention.
types of market failure:
– negative externalities
– positive externalities
– public goods
– information gaps
government must understand ALL costs and benefits.
negative externalities.
solving with taxes.
consumers and producers overproduce and overconsume due to negative externalities, leading
to a welfare loss.
– government can make production more costly for firms. increasing MPC of production.
– this shifts MPC up as PC increases.
– this creates MPC + TAX
– which intersects MPB at the socially efficient equilibrium
– no more overproduction (gap between market equilibrium and socially efficient
equilibrium) as Qm moves to Q*
– no more welfare loss
– negative production externality has been internalised.
, EVALUATION:
● must choose the correct size of the tax to account for the size of the external cost
(vertical distance between MPC and MSC) to small of a tax MPC will not shift upwards
enough to get to the socially efficient equilibrium.
note: for negative consumption externalities just use a supply and demand diagram to show
supply shifting upwards to supply + tax, show vertical distance as size of tax and
overconsumption reducing from the gap between Qm to Q*. negative consumption externality
internalised.
solving with a cap and trade system. (TPP)
introduced in 2005 as part of the emissions trading scheme (ETS), to reduce carbon emissions
and slow down global warming.
– government sets a cap : how much pollution is allowed to be let off in a year. 2bn tonnes of
carbon each year. (belief that 2bn tonnes is socially efficient; firms can continue to
produce goods but still cut down carbon emissions).
– government gives permits (1 permit = 1 tonne of carbon) to firms.
– gives out until 10% of 2bn permits are left. remainder is left to auction.
– this raises tax revenue, which the government can then use to subsidise eco friendly
companies, fund renewable energy
types of market failure:
– negative externalities
– positive externalities
– public goods
– information gaps
government must understand ALL costs and benefits.
negative externalities.
solving with taxes.
consumers and producers overproduce and overconsume due to negative externalities, leading
to a welfare loss.
– government can make production more costly for firms. increasing MPC of production.
– this shifts MPC up as PC increases.
– this creates MPC + TAX
– which intersects MPB at the socially efficient equilibrium
– no more overproduction (gap between market equilibrium and socially efficient
equilibrium) as Qm moves to Q*
– no more welfare loss
– negative production externality has been internalised.
, EVALUATION:
● must choose the correct size of the tax to account for the size of the external cost
(vertical distance between MPC and MSC) to small of a tax MPC will not shift upwards
enough to get to the socially efficient equilibrium.
note: for negative consumption externalities just use a supply and demand diagram to show
supply shifting upwards to supply + tax, show vertical distance as size of tax and
overconsumption reducing from the gap between Qm to Q*. negative consumption externality
internalised.
solving with a cap and trade system. (TPP)
introduced in 2005 as part of the emissions trading scheme (ETS), to reduce carbon emissions
and slow down global warming.
– government sets a cap : how much pollution is allowed to be let off in a year. 2bn tonnes of
carbon each year. (belief that 2bn tonnes is socially efficient; firms can continue to
produce goods but still cut down carbon emissions).
– government gives permits (1 permit = 1 tonne of carbon) to firms.
– gives out until 10% of 2bn permits are left. remainder is left to auction.
– this raises tax revenue, which the government can then use to subsidise eco friendly
companies, fund renewable energy
