...in the data and your own economic knowledge, evaluate the economic case for and against governments attempting to influence how mobile phones are manufactured and used. (25) The government should intervene in the mobile phone market to correct market failure due to the presence of negative externalities. Negative externalities are detrimental third-party effects caused by the production and/or consumption of a good. A public good is a good provided free of charge to the consumer, by the government. A public good is non-excludable and non-rivalrous. A merit good is a good that gives positive externalities upon production and/or consumption. A merit good is non-excludable, yet rivalrous. The negative externalities of mobile phone production stem from the production and consumption of the service broadcasting masts provide. The demand for broadcasting masts is derived from the demand for mobile phones. Broadcasting masts are said to cause negative externalities in the form of health-issues, such as cancer (Extract F, line 7). Negative health effects are a drain on government resources as healthcare is provided as a public good by the government, in the form of the NHS. An increase in cases of ill-health will cause an increase in the demand for the NHS, costing the government and tax payers money which is finite and must be put to its best use. As the demand for mobile phones is highly inelastic (Extract E, Line 9), the demand for broadcasting masts is unlikely to decrease if...
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...Government intervention in markets 1 Remedies for market failure Activity 1, page 163 a It has declined. The state now owns less of the country’s housing stock. b That the state thinks there is less market failure in the housing market now than in 1979. use. Figure 1 shows that drivers do not initially pay for the negative externalities (external costs) they generate. A tax equivalent to the marginal external cost would push price up to PX. Road use would be reduced from Q to QX, the socially optimum level. In practice, it is difficult to estimate external costs. d Congestion and other negative externalities caused by car use will increase. Road use by cars is likely to continue to increase in the absence of government action because: the price of road use does not reflect its true costs; road use is income inelastic – as incomes rise, people use their cars more and more families have cars; increasing economic activity and geographical mobility mean there are likely to be more cars on the road. Activity 2, page 163 a The action suggests that pre-2003 car use was above the socially optimum level. This is because the Mayor’s action was designed to reduce car use. b Two other policies which could be used are to increase the cost of parking and to increase cycle and bus lanes in central London. Figure 1 MSB MSC MPC costs/benefits Activity 3, page 164 a The government does not provide IVF treatment in every region because of lack of resources. b NHS IVF treatment is a substitute...
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...Government intervention in markets 1 Remedies for market failure Activity 1, page 163 a It has declined. The state now owns less of the country’s housing stock. b That the state thinks there is less market failure in the housing market now than in 1979. use. Figure 1 shows that drivers do not initially pay for the negative externalities (external costs) they generate. A tax equivalent to the marginal external cost would push price up to PX. Road use would be reduced from Q to QX, the socially optimum level. In practice, it is difficult to estimate external costs. d Congestion and other negative externalities caused by car use will increase. Road use by cars is likely to continue to increase in the absence of government action because: the price of road use does not reflect its true costs; road use is income inelastic – as incomes rise, people use their cars more and more families have cars; increasing economic activity and geographical mobility mean there are likely to be more cars on the road. Activity 2, page 163 a The action suggests that pre-2003 car use was above the socially optimum level. This is because the Mayor’s action was designed to reduce car use. b Two other policies which could be used are to increase the cost of parking and to increase cycle and bus lanes in central London. Figure 1 MSB MSC MPC costs/benefits Activity 3, page 164 a The government does not provide IVF treatment in every region because of lack of resources. b NHS IVF treatment is a substitute...
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...lead to market failure. This is because the free market forces generally ignore the external cost. For example, driving a car imposes a private cost to the driver but driving a car also creates a greater social cost for other people (the third party) in society such as; Noise and Air Pollution. Question 2. From Extract D, I have observed that the cost of operating a speed camera per site is approximately about £21093. This is higher than the cost of operating per traffic light camera, for which the cost is about £14693. I have also observed that the annual fine income generated by speed cameras is higher at £6,730,000 than that of the annual fine income generated by traffic light cameras, which is at £1,632,000. Question 3. A merit good is a good or service which generally consist of positive externalities that benefit the greater society in general. These good/services are provided by the state as the market forces fail to provide them at an optimal output. Merit goods are often underprovided because the consumers of these merit goods do not consider the greater social benefit and mostly the private benefit of consuming the good. This means that the positive externalities are not taken into consideration. Therefore the quantity consumed ends up at QP; therefore the marginal private benefit is below the marginal social cost. As the market only produces match the quantity consumed at QP. As a result a welfare lost at ABC is created as the market does not...
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...Discuss the extent to which regulations alone can be used to correct the market failure associated with the sale of fast-food. Regulation involves the imposition of rules, controls and constraints which restricts freedom of economic action in the market place. Fast-food is a de-merit good which is where the social costs of consumption exceed the private costs. The consumption of de-merit goods can lead to negative externalities, in the case of fast-food, negative externalities such as becoming obese or causing serious health issues can be produced. Also, consumers are unaware of the risks or they do not receive the information they need on the menus thus there is a problem of information failure because companies do not put on menus how much calorie a certain food is and if they wish to do so it is sometimes not visible for consumers. Moreover, market failure occurs when the free market mechanism fails to achieve economic efficiency, in this case, market failure has occurred because there hasn’t been allocative efficiency since consumer welfare has not been maximised as more people are becoming obese or are facing serious health issues because of fast foods. MAKE SURE TO ADD IN GRAPH!!!!!!!!!!!!!!!!!!!!!! + EXPLAIN IT!!!! In addition, regulations may help to correct market failure because a regulation will force firms to put calorie content on the packaging and this may help to put people off from eating fast food. This could be due to the fact that they would be more...
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...Q1. Market failure occurs when resources are not allocated in the most efficient way to achieve highest possible social welfare. In a free market society certain goods and services would not be provided by the private sector as they would not be profitable enough for the companies producing them. As a result, society as a whole would suffer. The government steps in to provide the goods and services required by society that private firms will not provide. These public goods include street lighting, emergency services and public spaces eg parks. These services are paid for by the government which collects the funds through taxation. Merit goods are also funded or subsidised by the government. These are goods or services which people would generally not choose to pay for or think to save for which the government thinks are important ie education, libraries, NHS medical treatment. In the UK every child has the right to an education but many households would not be in a position to pay for it. Likewise, before all prescriptions were free in Scotland, there were still some who qualified for free prescription which were funded by the government ie low income households including those in receipt of certain benefits, elderly people of pension age, and children under the age of 16 or 16 and 17 year olds who were still in education. The presence of externalities can contribute to market failure where the actions of a firm leads to a greater social cost ie the presence of lead in car...
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...Q1. Market Failure: is to do with not having enough resources to produce enough goods and services needed neither by the government nor by the society, as a result of this failure, the government develop a role to intervene in the economy in order to overcome these problems. 1. Public goods: According to the business dictionary, public good is an item whose consumption is not decided by the individual consumer but by the society as a whole; and which is financed by taxation. A public good or service may be consumed without reducing the amount available for others and cannot be withheld from those who do not pay for it. E.g. parks, police services, fire services etc. Consumers have an incentive to not reveal their willingness and ability to pay for public goods if they believe that they will be expected or required to contribute to financing the public good accordingly by the government. After all, if the public good is supplied, it will be available to them just as it would be to anyone else because pure public goods are non-excludable. This is the essence of the “free rider problem”: the incentive which consumers have to avoid contributing to financing public goods in proportion to their valuation of such good. Good examples to use include TV licence dodgers and people who choose to evade the Council Tax but who still receive local authority services. Another example might be a group of residents in a block of flats who all stand to benefit from the refurbishment of an...
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...essays are for revision purposes giving suggestions for how to answer questions. Don’t try to pass them off as your own work. AS Micro Essays 1.Evaluate the case for and against governments intervening to try to stabilise the price of copper, for example, through setting up a buffer stock scheme. 2.Evaluate advantages and disadvantages of various methods of government intervention to correct market failure arising from aircraft emissions. 3. Discuss the likely effects on the retail market for coffee if there is a large increase in city centre rents. 4.In the UK, students face increasing tuition fees. Discuss the benefits and costs to society of abolishing all tuition fees. 5.Discuss three policies to reduce the level of cigarette smoking amongst under 21s. 6.Discuss the extent to which governments should subsidise companies who are developing cars which run on clean fuels such as hydrogen? 7.Discuss whether the government is mistaken to worry about monopoly power? 8.Discuss the advantages and disadvantages of the government intervening in agricultural markets? 9.Discuss the effects on UK business of a rise in fuel prices. 10. Discuss whether the government should end free health care for people and make them take out private health care insurance like in the US? 11. Discuss the role that pollution permits could play in reducing global warming 12. Discuss the case for implementing a congestion charge for driving into Birmingham city centre. 13. Discuss...
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...Microeconomics Unit 4 IP Pure, Per Se, and Natural Monopolies September 16, 2012 Krugman stated, “Externalities are actions that create side effects that are not properly taken into account. Externalities are one of the principal sources of market failure” (p.434). Two policies that can be used to reduce the total amount of emissions is emission taxes and tradable permits. Krugman stated, “Emissions tax is a tax that is charged depending on the amount of pollution a factory produces” (p.442). Factories are taxed on every unit of pollution produced. The benefit of charging an emission tax is you are giving the factory reason to reduce pollution. They are paying for or being taxed for every unit of pollution they produce. The factory can impose the tax on the consumer, which in turn will decrease supply. When prices are increased, the market quantity or quantity being produced is decreased. Emission tax will decrease the marginal social cost because less pollution will be released. That leaves less cost to the society to clean it up. The marginal social benefit on the other hand will increase because the marginal social cost is decreased. The marginal social benefit is increased because of the money that the society is saved from decrease in the marginal social cost. Therefore, creating the optimal level of pollution. Emissions tax helps to solve the problem of economic inefficiency by allowing...
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...Intervention in the market What are the main reasons for government intervention? The main reasons for policy intervention are: •To correct for market failure •To achieve a more equitable distribution of income and wealth •To improve the performance of the economy Options for government intervention in markets There are many ways in which intervention can take place – some examples are given below Government Legislation and Regulation Parliament can pass laws that for example prohibit the sale of cigarettes to children, or ban smoking in the workplace. Employment laws may offer some legal protection for workers by setting maximum working hours or by providing a price-floor in the labour market through the setting of a minimum wage. The economy operates with a huge and growing amount of regulation. The government appointed regulators who can impose price controls in most of the main utilities such as telecommunications, electricity, gas and rail transport. Free market economists criticise the scale of regulation in the economy arguing that it creates an unnecessary burden of costs for businesses – with a huge amount of “red tape” damaging the competitiveness of businesses. Fiscal Policy Intervention Fiscal policy can be used to alter the level of demand for different products and also the pattern of demand within the economy. Indirect taxes can be used to raise the price of de-merit goods and products with negative externalities designed...
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...Market Failure It occurs when the forces of market fails to allocate resources efficiently. Some causes of market failure include imperfect competition, external costs, etc. Our focus will be on external cost and how Bangladesh’s textile industry has contributed to market failure. Overview of Bangladesh’s Textile Industry Textile industry is the second largest industry in the world next to agriculture. Bangladesh has emerged, in just under a decade, as the twelfth largest textile manufacturing nation in the world. This industry has been one of the most success stories of Bangladesh over the last two decades. Textile industries are one of the largest and vital industrial sectors of Bangladesh with regard to earning foreign exchange and labor employment, providing 4.5 million jobs of which 80% are women and contributes 13% to GDP. A huge 78 percent of the country’s export earnings come from textiles and apparel, according to the latest figures available. Bangladesh exports its apparel products worth nearly $5 billion per year to the United States, European Union, Canada and other countries of the world. It is the sixth largest apparel supplier to the United States and EU countries. Combined, the textile and apparel sectors consist of 3,600 firms. There is a concentration of manufacturing activity in and around the capital city of Dhaka and a growing garment manufacturing presence in the country’s export processing zones. Environmental hazard arising from textile industry ...
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...Chapter 8 Producer and Consumer Surplus consumer surplus — the value the consumer gets from buying a product less its price. producer surplus — the price the producer sells a product for less the cost of producing it. Burden of Taxation A tax paid by the supplier shifts the supply curve up by the amount of the tax. The loss of consumer and producer surplus from a tax is known as deadweight loss . Deadweight loss is shown graphically by the welfare loss triangle — a geometric representation of the welfare cost in terms of misallocated resources caused by a deviation from a supply/demand equilibrium. The cost of taxation includes the direct cost of revenue paid, lost surplus, and administrative cost. Interestingly, in terms of aesthetics, people have come to like the style of Paris roofs; it is one of the many things that makes Paris distinct. Including aesthetics complicates the analysis enormously. Economic reasoning is based on the architectural view that form follows function. Who Bears the Burden of a Tax? Taxes are like hot potatoes: Everyone wants to pass them on to someone else. Nobody wants to pay taxes, and there are usually large political fights about whom government should tax. For example, should the Social Security tax (mandated by the Federal Insurance Contributions Act, or FICA) be placed on workers or on the company that hires them? The supply/demand framework gives an unexpected answer to this question. Burden Depends on Relative Elasticity ...
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...Who does really pay for our Burgers? Institutional Causes, Effects and Solutions to the Meat Industry’s Contribution to Global Warming WHO DOES REALLY PAY FOR OUR BURGERS? 1. Introduction ‘All across the world, in every kind of environment and region known to man, increasingly dangerous weather patterns and devastating storms are abruptly putting an end to the long-running debate over whether or not climate change is real. Not only is it real, it's here, and its effects are giving rise to a frighteningly new global phenomenon: the man-made natural disaster’ (Obama, 2006). Global warming is one of the biggest threats to the environment and human well-being; today but even more for future generations. Global warming refers to the rise of the average temperature on earth. The greenhouse effect makes earth feasible for life. Without its protecting layer of several greenhouses gases (GHGs) such as carbon dioxide, methane or nitrous oxide, the average temperature on earth would not be a life-sustaining fifteen degree centigrade but minus six degree (FAO, 2006). By trapping part of the infrared radiation which would have otherwise bounced back into the cosmos, greenhouse gases keep the warmth. Adding to an ancient natural level human GHG, emissions have increased the amount in the atmosphere of e.g. carbon dioxide and methane since the beginning of the industrial revolution by 36 and almost 150 % respectively with an increasing tendency (EPA, 2007). While scientific research...
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...Question 2: The Coase Theorem states that if property rights are well defined, and no significant transaction costs exist, an efficient allocation of resources will result even with externalities (Harris, 2002). Coase argued that market failure, can be privately solved to an optimal level when the legal system intervenes, giving property rights to one of the parties involved. Essentially, the theorem is based on two underlying assumptions which are low transaction costs and the assignment of property rights. Firstly, the assignment of property rights is the right to have the exclusive use of their property, including the right to buy and sell it (Hubbard et al, 2009). Initially, polluters pollute because they believe they have the right too although the third party affected believe they have the right to less pollution. Hence without property rights, an inefficient level of equilibrium will be produced until the point in which the market intervenes assigning property rights. Another vital assumption is low transaction costs, which are the costs in time and other resources that parties incur in the process of carrying out an exchange of goods and services (Hubbard et al, 2009). As transaction costs of negotiating, binding and monitoring the agreement are very expensive when many individuals are involved, the transaction costs can exceed the gains from the transaction itself. When these two assumptions are held, an optimal solution will be reached when the monetary damage of one...
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...particular type of market failure. Identify that market failure, and illustrate the failure using an appropriate diagram. Ans. Cigarettes represents a market failure of externatilities. They are sited as negative externality as they affect the wellbeing of the bystander and the person neither pays nor receives any compensation for that negative effect. A smoker enjoys the puff of the smoke and the bystander inhales the fumes of the cigarette and indirectly suffers health hazards. And if the bystander fells sick because of the smoke as one reason he will not be compensated by the smoker for the ill- health and therefore, smoking has a negative impact on a person who has not paid for the cigarette and still has suffered a loss. This reduces the MSB by the extent of the negative effect on bystander; hence the socially efficient smoking is less than the free market level of smoking. A Negative Externality in Consumption can be analyzed by a decrease in the marginal social benefit of consumption below the marginal benefit to consumers. (If a smoker benefits $8.20 and non-smokers lose $4.00, then society as a whole benefits $4.20) S = MC D = MB 0 5,000 10,000 15,000 E Price of a pack of cigarettes Quantity of cigarettes $14 12 10 8 6 4 2 MSB MSB curve shifts downward by the amount of the externality --- the marginal external effect Q 2. Many economists believe that a Pigovian tax is the most efficient mechanism for offsetting this market failure. Explain what...
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