Introduction to Markets and Market
Failure(1.4)
Advantages of tradable pollution permits - correct answer-- Should benefit environment in
long run by encouraging firms to use green production costs.
- If firms exceed their permit they have to purchase permits from those who did not use all
their permit. This raises revenue for those firms.
- Revenue gained from these traded pollution permits can be reinvested
Causes of Government Failure - correct answer-Distortion of price signals - gov subsidies
could distort price signals by distorting free market mechanism.
Unintended consequences - when actions of producers and consumers have unexpected or
unintended consequences. - with gov policies - consumers react in unexpected ways.
Excessive administrative costs - the social benefit of a policy might not be worth the financial
cost of administrating the policy. It might cost more than the gov anticipated and consider
whether the policy is good or not.
Information gaps - same policies might be decided without perfect information. - could be
time consuming and expensive and so irrational decisions can be made. - impractical for gov
to gain every bit of information they need. So assumptions are made.
Disadvantages of traceable pollution permits - correct answer-- Firms might pass higher
costs of production to consumer
- Competition could be restricted in market if permits creates barrier to entry in market.
-Could be expensive for govs to maintain emissions.
- Could cause firms to reallocate resources to where they could pollute without limits -
therefore reduce pollution costs
Government Intervention - correct answer-Regulatory actions taken by a government in
order to affect or interfere with decisions made by individuals, groups, or organizations
regarding social and economic matters.
Indirect taxes - correct answer-Indirect taxes are taxes on expenditure. They increase
production costs for producers, so producers supply less. This increases market price and
demand contracts. - could be used to discourage the production or consumption of a demerit
good or service. - reduce negative externalities.
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