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OCR F581 Markets in Action - 11 May 2015

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Pardon me. Quietly confident I would say, would quite enjoy an 18 marker on policies to correct market failure from negative externalities.

Aw ye

Reply 781

andymcc97

Original post by MilesMcgrady

Pardon me. Quietly confident I would say, would quite enjoy an 18 marker on policies to correct market failure from negative externalities.

afternoon gents.

Reply 782

Pato1

his is to help with comment questions and the 18 mark questions

Demand & Supply Question:

Impact depends upon the extent of the shift.
If demand shifts, the impact will depend on elasticity of supply.
If supply shifts, the impact will depend upon the elasticity of demand.
Impact of shift also depends upon other factors – if they stay the same (ceteris paribus) or change.

Elasticity Question

It is only an estimate, so may not be accurate and can’t be relied on for future decisions.
Depends upon other factors changing.
Depends upon the time period, e.g. PES more elastic in the long run.

Subsidy

Advantages of Subsidy
+ Encourages producers to supply goods with positive externalities.
+ Reduces producers costs.
+ Encourages consumption of a merit good.
+ Can correct the level of consumption to reflect Allocative efficiency.

Disadvantages of Subsidy
- Opportunity Cost to Government
Hard for government to set right amount of subsidy.
Effectiveness depends upon PED – limited effect if inelastic.
Time lag
May fail to pass on the subsidy.

Evaluation: Depends on level of subsidy; if passed on; PED. Most effective method, although other measures may be useful.

Taxation

Advantages of Taxation
+ Raises revenue for government, which can then be used to correct market failure.
+ Allows the market to function properly.
+ Polluter is forced to internalise the externality and make the polluter pay.

Disadvantages of Taxation
Hard to determine size of tax, should equal externality, but calculating externality is hard.
Some of tax burden is passed on to consumer.
If demand is inelastic, consumption will not fall by as much as intended.
Inflationary.

Evaluation: Depends on if tax is at correct level; if product is inelastic will be less effective as producer could pass tax on to consumer; effectiveness depends on level of tax and if combined with alternatives.

Regulation

Advantages of Regulation
+ Easy to understand.
+ Enforced by law.
+ Can modify behaviour to correct market failure.
+ Aim to result in optimum allocation of resources.
+ Especially important if there is a high risk of market failure.

Disadvantages of Regulation
Must have a high level of public support.
Opportunity cost to enforce them.
May lead to a black market.
Do not compensate those that suffer from market failure.
Hard to set appropriate standards.

Evaluation: Depends on how well enforced; may be combined with increased info to gain public support; depends on how much they cost.

Tradable Permits

Advantages of Tradable Permits
+ Fairly easy to implement.
+ Allows the market to help solve the problem and gives firms the incentive to reduce negative externalities.
+ From government’s perspective, achieves desired environmental outcome.

Disadvantages of Tradable Permits
Expensive to monitor, so opportunity cost.
Does not compensate victims of pollution.
Problems of calculating and distributing permits to polluters.

Evaluation: Opportunity cost means money may be better spent on subsides; permits may be set at a too high level; so depends upon the level and how enforced.

Information Provision:
Advantages of Information Provision
+ Shifts the Demand curve instead of Supply (tax/subsidy) and so is more useful on PED elastic goods.
+ Can be cheap and easy to implement
+ Corrects the information failure (asymmetric information, incorrect information and misleading information) in the market that the firms have no incentive to do (as it would harm revenue etc.).

Disadvantages of Information Provision
- Government Failure, may provide information that could cause a greater market failure.
- Consumers may ignore information
- If PES is inelastic it is have a limited effect on Qd.
- Opportunity cost, could be spent on more effective tax/subsidy/regulation.
- Bonus: Assumes the Government has a greater knowledge of what is a demerit good/merit good for the market than the individuals themselves.

Evaluation: Depends on the extent of information failure in the market. How well the information is communicated and if it reaches all sectors of society. There is also the problem with changing tastes/fashion that have long been established, people are not forced to change their consumption. Time lag between provision of information and discovery of substitutes is relevant. Other methods may be better (compare directly and briefly where they are better/worse).

Reply 783

MilesMcgrady

Original post by andymcc97

afternoon gents.

Hello mate, how's the revision going?

Reply 784

jamesnicholson9

Original post by andymcc97

afternoon gents.

Hey you.

Reply 785

RaghuR5

I've just done the 18 mark Question - Discuss whether healthcare in the UK should be funded by the government or the private sector? - F581 Jan 2010

If anyone has the time can they please mark it or suggest improvements?

18 mark question:
6) The private sector is where the privately owned firms pay for goods and services. Healthcare in the UK is provided by the government and is called the NHS. Most of the money the government use is from tax revenue and only 2% is from other charges. There are many benefits and disadvantages which come from both sides. Healthcare is a merit good which means that it is a good that is under-provided by the market mechanism.

The government has been paying for the NHS for over the past 50 years and this has led to many positive externalities where the social benefits are higher than the private benefits, for example it leads to a healthier economy where there is a better standard of living. This in the long term can lead to higher output in the economy and so promotes economic growth. However, there is the opportunity cost of the benefit of more skilled workers from spending the money on education which could’ve led to an increase in the UK's economic growth.

The private sector also has its benefits. Recently it has been able to provide some services that the government funded NHS can’t provide such as better quality treatment. Other advantages of a private sector are that it creates competition, as well as being effective. But some people may see the private sector as a battle between firms to gain profit and not really care for the healthcare of the people.

Overall, it depends on whether the government is willing to pledge more money into the NHS or whether the private sectors can keep up the efficiency levels. Regarding the information failure of people not knowing the benefits of the NHS, countries such as the US buy health insurance and so are covered with all the information whereas many UK residents may not know about what kind of healthcare they will receive from the government.

Graph: Graph can be showing a PPF with education and healthcare and resources being allocated towards the healthcare side, shown by a movement of points with an arrow.

Reply 786

andymcc97

Original post by MilesMcgrady

Hello mate, how's the revision going?

Solid revision so far I think. 1 down, 2 to go in terms of papers today then 3 more tomorrow. Just need to get the definitions nice and crisp.

Reply 787

hyjacked

What do you think will come up on Monday?

Reply 788

MilesMcgrady

Original post by hyjacked

What do you think will come up on Monday?

XED or PES or both, apart from that I'm not going to bother making any predictions

Reply 789

justfly

What's an alternative to tradable permits and why is it better?

Reply 790

Pato1

expecting

producer surplus question
xed

Reply 791

midgemeister7

Original post by RaghuR5

The private sector is where the privately owned firms pay for goods and services.

This seems like an awkward definition - firms don't pay for finished goods and services on the whole, consumers do. I would suggest it being more to do with resources being allocated through market forces of demand and supply. Perhaps even saying that it is run by individuals and firms rather than the government would suffice.

I don't want to/can't really give it a mark, but you seem to have based the middle part of your essay too heavily on macro principles. You should focus more on allocative efficiency, public goods and more specific externalities.

(edited 8 years ago)

Reply 792

DKN96

Anyone have the MS for the may 2014 paper? Thanks in advance

Reply 793

JYNE

I'm confused about the diagram we draw showing tradable permits being a way to correct the market failure? Do we draw the supply shifting to the left as an indication of the government tightening their supply of permits and so reducing the quantity supplied and the amount of pollution firms are emitting? Or the one where demand increases (because more firms will demand permits) Or both?

Reply 794

johnnyboy1

What do people reckon will come up for the 18 marker? I have a feeling tradable permits or regulations?

As for the elasticity questions I reckon XED or PES?

Reply 795

hyjacked

Original post by JYNE

Don't you reduce S as the permits limit what companies can produce

Reply 796

johnnyboy1

Original post by justfly

What's an alternative to tradable permits and why is it better?

Regulations or subsidy to cleaner alternative I'd say. Regulation ensures that firms will not pollute over the limit as they will not be able to buy more permits so this reduces the excess negative externalities. Subsidy to cleaner alternative encourages firms to invest in renewable cleaner method of production and reduce the level of pollution in the long run. Hope this helped mate

Reply 797

JYNE

Original post by hyjacked

Don't you reduce S as the permits limit what companies can produce

Okay, thank you I wasn't sure

Would there ever be a case where we'd have to draw demand increasing (for the permits)

Reply 798

hyjacked

Original post by JYNE

Okay, thank you I wasn't sure

Would there ever be a case where we'd have to draw demand increasing (for the permits)

I have never drawn a graph for demand and supply of permits just their affect. And then say that they act as an incentive to not pollute, for example, as they can make a profit from selling them to other firms. However, it is hard for the government to know how many to dish out.