(Original post by fruitfox)
a) Explain how, by adversely affecting the environment, economic activity can lead to market failure. (20 marks)
b) Evaluate the view that government intervention can correct all market failures caused by the effects of economic activity on the environment? (30 marks)
Please help, any ideas would be welcome!
Firstly I don't think this belongs here.
a) Environmental damage represents a social cost which isn't reflected in the price of the economic activity (a negative externality). This represents a mis-allocation of scarce resources; and causes market failure. Duno how you'd get 20 marks though - just stick in some examples (ie. pollution, deforestation).
b) Reasons why:
- Can brake up monopoly power through regulation
- Pollution permits to stop environmental damage and encourage more efficient production - long term sustainability
- The government have a range of tools at their disposal to cover most/all market failures: taxation, subsidy, legislation, information provision, etc
Reasons why it can not:
- Chance of government failure, creating other negative externalities
- Hard to quantify the social cost in monetary terms
- Attempts to make markets more contestable (ie. removing barriers to entry), may not attract enough/any competition
- Government funding for public goods may not be enough for high quality
- Naturally, they will not be able to stop ALL, as time changes, funds are limited and firms may find 'loopholes' in the intervention methods
Duno anymore. It's been a while since I've done micro :/