can someone answer this question for me please

use your economic knowledge to assess the view that
regulation is the best way of dealing with the market failure that results from the
consumption of cigarettes.

(edited 3 years ago)

Reply 1

Clearing and Applications Advisor

Tsr isn’t here to do your work for you. If you explain what you think could be the answer and what you’re stuck on then people will be more likely to want to help you.

Reply 2

stephsmhb

Original post by lisa lisa

use your economic knowledge to assess the view that
regulation is the best way of dealing with the market failure that results from the
consumption of cigarettes.

Regulation increases costs for firms, this will lead to a shift in the AS curve which you can demonstrate in an AD/AS diagram.
You can also use an externalities diagram.

For evaluation discuss other ways which may be better e.g. indirect tax or perhaps talk about potential government failure where the government intervention also leads to market failure.

Does that help?

Reply 3

BenRyan99

Careers Forum Helper

Original post by lisa lisa

use your economic knowledge to assess the view that
regulation is the best way of dealing with the market failure that results from the
consumption of cigarettes.

So clearly consumption of cigarettes is a negative consumption externality so MPB>MSB so there's an overconsumption and this creates the dead weight loss. In terms of regulation you've got a few options, a ban (not ideal as the socially optimal quantity in your externality diagram will be above 0). You could also levy a tax on the consumption as this has a double dividend (fixes externality and generates gov tax revenue) but the tax would need to be set at the correct rate and the cost could be passed onto consumers which is regressive.

In terms of alternatives to regulation is Coase Bargaining, not sure you'll have covered it yet but basically if you properly enforce property rights (clean air in this example) and ensure no transaction costs, then private individuals will be able to freely bargain with each other to achieve an efficient outcome.