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Lecture notes 4.3.3 Policies to deal with market failure
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4.3.3 Policies to deal with market failure Provision of public & merit goods, indirect taxation of demerit goods, tradable pollution permits,
provision of information, legislation, and regulation
Government can intervene to correct market failure
Indirect Tax
Tax on expenditure
They increase production costs, so producers supply less
Increases market price
Used to discourage production & consumption
Decreases demand
If tax = to external cost supply curve becomes MSC rather than MPC
Ad valorem tax
o Percentages such as VAT
o Customers may have to pay the tax making products more expensive
o Producers may have to pay the tax increasing their cost of production
o Tax could be split between both of the parties involved
o Affects the supply & demand of products
o Depends on the PED
o Inelastic products consumers pay tax
Discourages them from buying demerit goods
o
Specific tax
o Charged per item
58p per liter for fuel
o The more inelastic the demand the higher tax burden for consumer
o Lower burden for the producer
o
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