Do you write the evaluations in your arguments? or write them in a seperate paragraph like what is done here?
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Original post by
NPETER)
L1 L2
- Define market failure
- When the private consumer ignores the externalities that they cause and pay a price under the social optimum price. Hence, there is an over-consumption and misallocation of resources of the negative externality - such as pollution and blight - good which means that demand exceed the social acceptable supply of the good. This creates an external cost as the polluter does not pay the true cost which creates a welfare deadweight loss to society. As there is a misallocation of resources, there is market failure.
- (In context of the mode of transport of course)
- Taxes may aid in reducing this market failure.
L3
- A tax could be levied onto the producers to increase their cost of production --> this would essentially decrease the level of supply which they can output --> hence, supply shifts inwards and restricts output whilst increasing the price of the good (refer to a drawn negative externality diagram) --> this makes the polluter pay the true cost of the their consumption while allocating resources efficiently --> which internalises the deadweight welfare loss and therefore the market failure.
- Taxes are easy to apply and could be done immediately --> this saves time and quickly reduces the market failure if enforced to an adequate level --> For example, Vehicle Excise Duty VED that ensures that heavier - more environmental unfriendly - vehicles pay a greater price for their use. --> moreover, those who attempt to dodge taxes would be heavily fined --> this incentivises modal switch, buying more efficient (environmentally friendly) vehicles and actually paying the tax.
- Moreover, the tax would increase the level of revenue to the government --> they could use the tax to compensate those who were affected by the "negative externalities" --> for example, they could rehypothecate their additional tax revenue to subsidise households living near a congested road that were affected by the noise pollution in order for them to install double glazing windows --> this would reduce the cost of privately restoring their quality of life and their opportunity cost.
L4
- Hard to determine tax --> tax should equal external cost --> external costs could be physical costs or intangible costs --> physical costs could be calculated but intangible costs cannot be accurately defined --> people may price them differently --> hence there is a level of subjectivity on the weightings of costs --> for example, how to you price the extinction of a species due to pollution? --> It is also time consuming and costly to develop a price for a tax --> and even then it may still be inaccurate.
- if taxes are too high then people modal switch may occur on a large scale and displace the market failure onto another mode of transport --> this would just fragment the market failure and could spread to amongst other forms of transport and make the market failure even more predominant and perhaps entrenched --> causing government failure --> alternatively, it may be too small and encourage users to continue and cause the market failure --> again resulting government failure.
- There is also the opportunity cost of policing where individuals comply to taxes --> though this can be easily enforced as a requirement it is costly --> policing the tax may cost more than the revenue obtained from the tax and therefore making the governments financial position worse --> this can also encourage the growth informal economy as people could dodge taxes and bribe police officers --> essentially, it could be argued that the opportunity cost may have been better as a subsidy to subsidise other modes of transport such as bus services --> this would encourage a more integrated transport and may have encouraged a larger volume of modal switch as a result.
- PED of 'road use' is very inelastic due to the very inelastic demand for cars as road is derived demand --> a very large tax is required to materialise any significant changes in the levels of consumption --> the higher taxes rates would affect lower incomes more than higher incomes --> they may be forced off the road --> this may cause structural unemployment if there isn't an adequate provision of transport --> This may aid in fixing the market failure but it may cause structural economic weakness as a result.
L4+
- could be argued that regulation such as limiting the car ownership to one per family would be better than forcing a tax.
- policing would be just to check on a data base of the population and check if their ownership complies with the regulation
- this would reduce the supply of cars on the road and reduce congestion.
For both to actually work:
- It will depend on the level and seriousness of the government to enforce it.
- If there are adequate substitutes in the economy
I got tired... haha
Please check for mistakes or additional points.