Taxes Regulation
Types:
*bans
*age limits
*compulsory action
Information provision
Can solve; neg ext in production/consumption, demerit goods Regulation- rules and laws enacted that encourage a change in behaviour Quotas/caps
Solve; De-merit and merit goods
P; an indirect tax will increase the cost of production shifting S1 left to S1+tax ' Solves; neg ext in production/consumption, demerit goods, common access resources P: providing adverting or information provision in the form of TV campaigns, print advertising, changes to the school curriculum or
C; the price increases in the market from P1 to P2 with quantity decreasing from Q1 to Q2 packaging changes
C; the overproduction and overconsumption that existed in the market is now solved and resources are efficiently allocated at Q2. There Non market based policy policy
Chain of analysis C: individual consumers who are now well informed when making decisions will change consumption and consume more/less, it will shift
is no longer a misallocation of resources with welfare maximised due to this intervention. The externally has been fully internalised the MPB to MPB+advertising, which is had MSB
Regulation creates incentive for economics agents to change behaviour (increase/reduce consumption/production) if policy is strong
negext consumption Involves strict punishments for those found to be breaking the rules (fines) C: the market will then operate at the SOO with the over/underconsumption issues solved and allocative efficiency attained. Welfare has
negextproduction End result is solving the market failure increased in this market and will remain at this equilibrium for the long term
P
s , + tax ptCtB Allocative efficiency is reach and welfare maxed
de merit
s, msempcttax neg advertising -
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P: Demand could be inelastic as necessities, addictive or not many good substitutes available. C: measuring the value of the externality is difficult in reality, as knowing the exact impact of certain regulations altering the behaviour of economics l
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C: So as prices increase, quantity demanded decreases, but proportionally less than the price increase from P1 to P2. agents is imperfect S f
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C: could cause unintended consequences, if regulation is too lax the behaviour will not be altered enough to reach the SOO, as individuals ignore and Evaluation O M
O O
C:The decrease is quantity will help reduce the misallocation of resources bye may not be enough to fully solve the market failure and reach O O
continue to under/over consume. Or of regulation too strict. Could lead to government failure, as firms may shut down/ more country causing P: very costly
Q*. Consumers are absorbing a large proportion of the price rise and not reducing consumption greatly. Any overconsumption and
unemployment. A black market may form, which could be highly dangerous for consumers and may be worse than the product consumed legally. C: as for it to be successful it needs to be well targeted and spread to masses, all forms of media outlets and public forums need to be
overproduction problems will remain.
Firms may cheat/avoid the regulation, which make the market worse than before used increasing the cost dramatically.
C:Substantial opportunity cost involved, can argue of the most effective efficient use for tax payers money, especially if the advertising
P: Knowing the correct level of taxation is very difficult for the government. Putting an accurate value on neg ext is highly complex in reality. doesn’t have a noticeable impact on consumer behaviour
There are ways this can be done but not perfectly.
C:Tax may be set too low where the externality is not internalised and the price increase is not large enough to reduce quantity to the socially Examples P:no guarantee that advertising or information provision will work as intended
optimum level of output. Or if the tax is too high there are many unintended consequences that can outweigh the benefits of gov intervention. *plastic waste - 90% of ocean waste is plastic and it affects food supply, sanitation, and drinking water. The UK have banned plastic stirrers, C: if the quality of information/advertising is poor, unclear and not well targeted at the mass consumer , it will have little benefit from its use
C: For example if firms shut down and leave a country causing unemployment, a black market may form, could be highly dangerous plastic straws and cotton buds. Innovative deposit recycling scheme where consumers pay extra when buying an item with recyclable C: the cost of implementing such policies will outweigh the benefits, causing gov failure, where the pre-existing market failure remains with
worsening the extent of the externality. Could cause smuggling over boarders where taxes are lower. This will not reduce consumption and packaging ( as a deposit) and only revive economic back after successfully recycling the item a worsening misallocation of resources
will not generate tax revenue for the gov. *smoking in the UK- age limits must be 18 or over, advertising bans, public smoking ban from 2007, compulsory warnings on packaging,
compulsory graphic imagery on packaging, cigarettes sold behind closed counter, compulsory plain cigarette packaging P: this is a long run policy and not as effective in the short term
P: poor suffer proportionately more than the rich as indirect taxes are regressive, * obesity - forced calorie content on menus (USA), traffic light nutritional system, forced nutritional info on packaging, age limits must be 16 C: will not change consumer behaviour immediately. It takes time to educate the public enough to alter consumption habits and for
C: so it takes a greater proportion of the poor’s income than of the rich, widening the income inequality in society. to purchase energy drinks consumers to react to the information provided to them
C: Consumers are burdened even more if the demand of the product is price inelastic, as producers transfer more of the tax onto the C: consequently this policy in isolation is unlikely to be successful. Better to combined with taxation/subsidy as more likely to work where a
consumer with a proportionately smaller decrease in QD burdening low incomes consumers the most price can act as an incentive for consumers to change behaviour. Whilst information provision over time can make demand for the product
more price elastic as consumers become aware of benefits/dangers of consuming leading to the long run movement towards the SOO
Examples
*Uk sugar tax on fizzzy drinks (2018) to tackle childhood obesity, 1/3 of children ages 2-15 are overweight or obese. They are taxed increasing the price of
production. After it was introduced 50% of companies changed their recipes to ensure sugar volumes fell below the tax threshold, moving towards zero sugar
or low sugar alternatives. But general consumption of sugar has increased from 723,000 tonnes bought in 2015 to 743,000 in 2018, equivalent to a 0.5%
Market failure policies Price controls
increase in sugar consumption per person. Same done in Mexico, in first yr consumption reduced by 12% but now consumption is back at pre-tax levels Taxes, subsidies, regulation, tradable pollution permits,
*alcohol and cigarette duty Solve: de-merit and merit goods, income inequality and price volatility
*carbon tax State provision, information provision, price controls Chains of analysis - minimum price
* road pricing
And property rights Set above the equilibrium in the market to discourage consumption of de-merit goods
Raise the price above equilibrium levels from P1 to P2 to internalise the negative externality and discourage consumption
Solving over consumption issues and bringing the market to the allocative efficient production levels from Q1 to Q*
Subsides State provision
Eradicating a prior misallocation of resources max Price
min price
excuses p * alcohol costs £3.5bn annually
Examples p
supply to the NHS and £52bn overalll
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Can solve; pos ext in consumption/merit goods and underproduction State provision - direct provision of goods/services by the government, free at the point of * alcohol in Scotland (min)
*EU common agricultural policy (min) P2
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cost to the UK economy. A year
later Scotland’s alcohol
consumption
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P: a subsidy will decrease the cost of production shifting S1 right to S1+sub
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* rent control in New York, San Fran and Berlin (max) T a "
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consumption reduced by 3%,
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C: the price decreases from P1 to P2 with quantity increasing from Q1 to Q2 *energy price cap (max) but has started to increase
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Solves; merit goods and missing markets
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C: the underconsumption and underproduction that existed in the market is now solved and resources are efficiently allocated at Q2. I
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There is allocative efficiency and welfare is maxed Evaluation ! ! I D l l l
POS ext production Chain of analysis Q Qs Q , Qd
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pos ext consumption P: demand could be price inelastic Q* Q , Qs
The government will consider the full social benefit & social costs when allocating resources to maximise social welfare, this will allocate resources
P Ptc IB - -
at Q* the SOO C: as they are addictive and there aren’t many good substitutes available. Therefore as price increases due to the minimum price, quantity
Si Mpc Sub will decrease due to the law of demand, but proportionately less than the price increase. The decrease in quantity will help reduce the
mpct The good/service provided is free at the point of consumption (P=0) to ensure universal access
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misallocation of resources buy not enough to solve the market failure
A From this the under consumption/production is solved with universal access overcoming any inequality in the market
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MPB market for healthcare
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*state schools cost £100bn a year P: the poor will suffer proportionately more than the rich as minimum prices are regressive
Evaluation Q , Q2 Out f S
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*NHS costs £150bn a year, in a free market would be freely under C: they take a greater proportion of the poors income then they do of the rich
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P: very expensive to implement → o O
consumed and under provided, essential so on grounds of equity no C: widening income inequality in society. Consumers are burdened even more if the demand for the product is price inelastic due to
C; short run gain, but long run loss as tax cuts in areas such as education/healthcare worsening market failures in those areas. Could be cuts person should be denied access to healthcare. Large x-inefficiency as addictive in nature
in welfare spending or regressive tax rises, burdening poor and worsening income inequality lack of profit motive. Very long waiting lists due to excess demand
C; potential gov failure if cost of subsidy outweighs gains in welfare, worsening misallocation of resources *free school lunches at primary and for vulnerable students in the UK P: can be unintended consequences
C: can lead to gov failure where costs of intervention outweigh the benefits, like black markets may form or consumers may swap to
P: the gov cannot control how the subsidy is spent by firms D
alternatives that are actually worse for them, worsening the extent of the neg externality
Qb
C; could use subsidy’s to pay of debts or increase wages Q*rQD C: causing a new market failure and an unintended consequence, resulting in government failure.
Evaluation excess demand
C; they promote wastefulness and inefficiency and subsidy dependency. There is a large risk if the value of the subsidy is high increasing
government costs over time and the burden on future tax payers P:very expensive policy
P: knowing the correct level to set the minimum price is extremely difficult
C: As the state provides all resources in the market with very little private sector involvement, substantial opp cost.
C: putting an accurate value on the neg ext is highly complex in reality, can’t be done perfectly
P; knowing the correct level of subsidy is very difficult C: cuts will need to be made to welfare/ public services worsening existing market failures and income inequality. Or regressive tax rises in the
C: if set too low the externality is not internalised, so the price increase isn’t enough to reduce quantity to reach the SOO. If too high will
C:putting an accurate value on the positive externality is highly complex in reality future, burdening the poor and widening income inequality. Could result in government failure if cost of state provision outweighs the gains in
lead to gov failure and unintended consequences, such as firms shutting down or leaving the country causing unemployment
C: could lead to consequences if too low, as price decrease is not large enough to increase quantity to reach the SOO. If too high likely to lead welfare gain, resulting in worsening in the misallocation of resources
Chain of analysis
to gov failure Set below the equilibrium to encourage consumption of a merit good
P: now the government must deal with excess demand
Decreases price from P1 to P2, improving the affordability of essential goods/services
P:if the good or service being subsidised is a necessity such as education, falling prices will help with affordability C: at a price of 0, demand of Q1 is much larger than supply of Q*. In a free market price would ration scarce resources but with state provision
Allowing those in a free market who may not have had access, improving their living standards, reducing any underconsumption issues,
C: improving equitable outcomes where exclusion reduces and consumers can now purchase the good/ services improved living standards there is no price rationing
improving allocation of resources
C; could be a short term benefit as long term have to pay for financing of the subsidy via higher taxes. If regressive taxes, it will burden the C: the government must use non-market based approaches, such as with the NHS treating patients based on the severity of the condition to
poor, greater widening income inequality deal with the excess demand. Or a lottery is done or there are long waiting lists. Over-consumption is a major issue putting strain on public
Evaluation
services and those who work on the industry. Supplying more to meet demand would be too costly and extra quantity is not socially desired.
P: creates a shortage of BC
P: if demand for the good/service is price inelastic the majority of the subsidy will be passed onto consumers, with a proportionately larger This would be government failure.
C: Meaning many consumers will not able to access its despite lower prices, as existing suppliers have left the market or not willing to
decrease in price than increase in quantity supply at such a low price
C: good news for those who purchase the good, but will not increase quantity enough to fully solve the market failure P: knowing the right level for the state to provide is very difficult
C: consumers receive no benefit and must suffer from being on long waiting lists and with uncertainty, queuing and competition with other
C: consumers will not necessarily respond as there are non-price factors that dominate the reduction in price. E.g. with public transport C: assuming the state to have full information regarding true private and external benefits in consumption is unrealistic, the government suffer
buyers
consumers may not like the inflexibility, poor quality or unreliability, so hence don’t use it even if fares are cheaper. Those who are reliant on it, from lack of information
are for work so even if prices decrease, will not consume more of it. Therefore an underconsumption can remain with the market not fully C: if the quantity is too small, as the government can’t afford to provide at SOO, excess demand becomes an even greater problem. If too much
P:consumers who can’t purchase may find alternative supply in black markets
solved is provided, the cost of those extra units would outweigh the benefits risking gov failure
C: can be price exploitation, uncertainty and a loss of tax revenue, also smuggling
C: unintended consequence, which needs spending to police, consumers may have to smuggle, causing gov failure as there is a worse out
Examples P: is there a role for the private sector
comes for consumers
*agriculture in EU and USA C: due to excess demand, argument to mix and match private and public provision, for those who can afford private provision, without waiting
*museums in the UK have had subsidies since 2001 to provide free entry, increased visits by 184% times
P: it depends how heavily the level of maximum price is set up
*vaccinations in Hong Kong C: would reduce the burden on public services, freeing up more resources to be used for those who need it. This argument is true for areas of
C: if set a long way below the equilibrium price some consumers will benefit from really lowered prices, but the extent of the shortage and
*electric cars in UK, Germany and Canada health care which aren’t a merit good, such as plastic surgery and dental implants
black market activity will be higher risking significant gov failure. If only set below the equilibrium the excess demand and black markets
* research and development in the UK
activity will be less, but consumers don’t receive the benefits of being able to afford essential goods and services going against the
intention of the policy
