Economics - Minimum Prices Watch

studentgooner
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So I am going through some questions and am stumbled by an answer I am about to give...

Can the government intervene by the use of minimum prices in order to correct market failure arising from aircraft emissions?

Now I know minimum prices are usually used so suppliers get a fair price however surely if minimum prices were set for aircraft firms, their supply would decrease due to the increase in production costs?
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Wellzi
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(Original post by studentgooner)
So I am going through some questions and am stumbled by an answer I am about to give...

Can the government intervene by the use of minimum prices in order to correct market failure arising from aircraft emissions?

Now I know minimum prices are usually used so suppliers get a fair price however surely if minimum prices were set for aircraft firms, their supply would decrease due to the increase in production costs?
The point you should be making is although minimum prices will reduce demand and thus the negative externalities of airtravel, a tax would be much more effective as the government could use the tax revenue to cover the social cost of air travel ie. The costs of the negative externalities can be covered by the tax
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3121
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Setting a minimum price guarantees producers a certain amount per unit this provides an incentive for them to supply more, minimum prices costs the government as apposed to a tax which will raise their tax revenues. Minimum prices discourage consumption more than production so when looking to correct a negative production externality a minimum price really isn't helpful. Remember this, minimum prices INCREASE producer surplus and significantly DECREASE consumer surplus to that tiny little corner in between demand and the minimum price. So by setting a minimum price were giving the producers more revenue to carry out and expand their pollution, now demand for air travel is probably Inelastic for long distance travel so it won't be reducing demand that much, setting a minimum price for aircraft firms leads to further market failure after the government has intervened resulting in government failure.

Alcohol is a good example here, the production has little negative externalities but it's consumption has a vast amount so a minimum price could be suitable as argued by Nicola sturgeon
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Dennisomics
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Minimum price would probably worsen Market failure, for a negative externalities market, focus on tax,regulations,trade permits ( i would recommend for Emissions) and extended property rights.
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Wellzi
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(Original post by zayn008)
Setting a minimum price guarantees producers a certain amount per unit this provides an incentive for them to supply more, minimum prices costs the government as apposed to a tax which will raise their tax revenues. Minimum prices discourage consumption more than production so when looking to correct a negative production externality a minimum price really isn't helpful. Remember this, minimum prices INCREASE producer surplus and significantly DECREASE consumer surplus to that tiny little corner in between demand and the minimum price. So by setting a minimum price were giving the producers more revenue to carry out and expand their pollution, now demand for air travel is probably Inelastic for long distance travel so it won't be reducing demand that much, setting a minimum price for aircraft firms leads to further market failure after the government has intervened resulting in government failure.

Alcohol is a good example here, the production has little negative externalities but it's consumption has a vast amount so a minimum price could be suitable as argued by Nicola sturgeon
In the case of airtravel, producing more air travel ie more flights, then negative externalities are increased. So a tax would be much more effective than a minimum price to reduce negative externalities and the tax will cover the social cost. I know what I'm talking about, you don't need to define things for me you're the one asking for help.
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3121
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(Original post by Wellzi)
In the case of airtravel, producing more air travel ie more flights, then negative externalities are increased. So a tax would be much more effective than a minimum price to reduce negative externalities and the tax will cover the social cost. I know what I'm talking about, you don't need to define things for me you're the one asking for help.
Excuse me? You look pretty dumb since I was replying to the post not your bland and brief comment. That's pretty much what I said too, I'm not the person who started the thread asking for help.
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studentgooner
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(Original post by Wellzi)
The point you should be making is although minimum prices will reduce demand and thus the negative externalities of airtravel, a tax would be much more effective as the government could use the tax revenue to cover the social cost of air travel ie. The costs of the negative externalities can be covered by the tax
The questioned ask to Evaluate theadvantages and disadvantages of various methods of government intervention tocorrect market failure arising from aircraft emissions. so I had already wrote about indirect taxes, I was just trying to think of another government intervention other than advertisement because there isn't a lot to write about about that...
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Wellzi
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(Original post by zayn008)
Excuse me? You look pretty dumb since I was replying to the post not your bland and brief comment. That's pretty much what I said too, I'm not the person who started the thread asking for help.
Ye the profile pics threw me, sorry about that.
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keenafied
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With air travel, its the consumption that normally causes the negative externalities such as air pollution right? So a minimum price scheme would actually deter consumers from using air travel as its obviously more expensive. So you could say that the minimum price actually internalises the external cost. However, minimum prices usually result in excess supply so you could argue as an opposing point that the resources used to produce this extra supply could have been used more efficiently elsewhere, hence creating government failure as resources are being misallocated. You could also say that the governments imposing this minimum price might have to purchase the excess supply or fund it, hence administration costs arise resulting in further market and government failure. Therefore other schemes such as indirect taxes, trade pollution permits could be a more viable option.

Another point that could be made is that if governments impliment indirect taxes on aviation, in the short run consumption won't decrease due to being inelastic, however in the long run the government could use their excessive revenues for the provision of information such as the disadvantages of air travel in the hope that it will make consumers more elastic.

These are just points from the top of my head but there are obviously many more.

My AS Economics exam is tomorrow? Is yours? Anyway, Good luck!
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studentgooner
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(Original post by keenafied)
With air travel, its the consumption that normally causes the negative externalities such as air pollution right? So a minimum price scheme would actually deter consumers from using air travel as its obviously more expensive. So you could say that the minimum price actually internalises the external cost. However, minimum prices usually result in excess supply so you could argue as an opposing point that the resources used to produce this extra supply could have been used more efficiently elsewhere, hence creating government failure as resources are being misallocated. You could also say that the governments imposing this minimum price might have to purchase the excess supply or fund it, hence administration costs arise resulting in further market and government failure. Therefore other schemes such as indirect taxes, trade pollution permits could be a more viable option.

Another point that could be made is that if governments impliment indirect taxes on aviation, in the short run consumption won't decrease due to being inelastic, however in the long run the government could use their excessive revenues for the provision of information such as the disadvantages of air travel in the hope that it will make consumers more elastic.

These are just points from the top of my head but there are obviously many more.

My AS Economics exam is tomorrow? Is yours? Anyway, Good luck!
Yep mine is tomorrow too! Just going over practice questions! Good luck to you too !!
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keenafied
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(Original post by studentgooner)
Yep mine is tomorrow too! Just going over practice questions! Good luck to you too !!
You can have a look at a website I made a few weeks ago ; keenafied.wix.com/essays .. It contains some past paper model answers I've done for economics but theirs only like 6 on their as I didn't have time to type up all the ones I have written. I've done like 14 of the old spec past papers so if you have any questions ill be happy to answer!
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