hnd 经济学review for outcome 3

Evidence Requirements1. 2. 3. 4. 5. 6. 7. role of government in market failure externalities merit and public goods a government policy selected explanation of the policy instrument used to achieve policy evaluation in relation to market

Why public goods (1) Public good is a good or service to which the exclusion principle is not applicable; and that is provided by government if it yields substantial benefits to society. Private goods have two characteristics: divisible and exclusion. Divisible: they are produced in units small enough to be purchased and used by individual buyers. Exclusion: buyers who are willing to pay the price of the product obtain it, but those who are unwilling to pay are excluded from acquiring the product and its benefits. Because of these characteristics, the demand for a private good gets expressed in the marketplace, and profit-seeking suppliers satisfy that demand.

Why public goods (2) In contrast, a public good is not divisible. They must be produced in such large units that they cannot ordinarily be sold to individual buyers. Individuals can buy hamburgers or cars, but they cannot buy highways. The exclusion principle does not apply to public goods, because no way to exclude individuals from their benefits once such goods come into existence. E.g. streetlight. The classic example for public goods is a lighthouse on a treacherous coast. There is no practical way to exclude any captain who did not pay for building the lighthouse from using the light. This is called free-rider problem, in which people receive benefits from a good without contributing to its cost. Major public goods are defence, police, roads.

Example of free-rider Private goods. E.g. two people enjoy hot dogs, which cost $0.80 each to produce. If A wants to buy 3 hot dogs at $1 each, and B wants to buy 2 ones at same price, then the market demand curve will reflect that 5 hot dogs are demanded at $1. A seller charging $1 for each hot dog can gain $5 of revenue and earn $1 of profit. The situation is different with public goods. Suppose a sculptor creates a piece of art costing $600 and places it in the town square. A and B get $700 of enjoyment from the art. The sculptor asks donation from A and B, but they say they do not like it and refuse to give money. They become free-riders. The sculptor vows never to try anything like that again.

Public ownership of industry Generalization. From the above discussion, we can know that because of the free-rider problem (nobody wants to pay), the market demand for a public good is nonexistent or significantly understated, and firms lack a profit incentive to offer it for sale. On the other hand, society really needs this good. Thus, government have to provide it. Then, we have public ownership of industry.

Summary about public goodsDivisibility and exclusion principle applicable to Not applicable to Public goods Although everybody needs them, nobody wants

to pay for them.

Example of public goods: ?

Private goods

Free rider problem, market demand is nonexistent. Government must provide public goods.

Who needs them, has to pay for them.

Revisit merit good Merit good is a good or service to which the exclusion principle could apply, but that has such a large spillover benefit that government sponsors its production to prevent an underallocation of resources. Such goods include education, health care, museum and sewage, etc. They could all be priced and provided by private firms through the market system. But, they would be underproduced by the market system, because some people would not know or place enough importance on ―saving‖ money to pay for these goods, and some people would financially be unable to pay for these essential services. Therefore, government often provides them to avoid the underallocation of resources.

Summary about merit goods

Exclusion principle

Applicable to

Merit goods

Large spillover benefitExample of merit goods: ?

To prevent the underallocation, government should sponsor them.

How government policy influence environment and transport in UK Government uses several different policies to cope with market failure and often has to address the problem of externalities. London has recently introduced a congestion charge and Edinburgh Council is considering something similar in order to reduce the use of private cars in these cities. The Green Party has long held a policy to reduce traffic congestion by advocating greater use of public transport. These policies are designed to address negative externalities. With global warming a major concern for the future, there appears to be greater pressure on government to intervene in market failure.

Externality or spillover Externality or spillover is a benefit or cost associated with the consumption or production of a good or service that is obtained by or inflicted without compensation upon a party other than the buyer or seller of the good or service. Positive externality is the benefit obtained neither by producers nor by consumers of a product but without compensation by a third party (society as a whole). Negative externality is the cost of producing a product borne neither by producers not by consumers of the product but without compensation by a third party (society as a whole). For example, manufacturing that causes air pollution imposes costs on others, while planting forests (rather than other agricultural activities) would improve the water quality of those downstream (benefits).

Pigovian tax A Pigovian tax is a tax levied to correct the negative externalities of a market activity. A Pigovian tax is considered one of the ―traditional‖ means of bringing a little of market forces, and thus better market efficiency, to economic situations where externality problems exist. In a true market economy, a Pigovian tax is the most efficient and effective way to c

orrect negative externalities.

Environment policy Market fails to solve environmental problems, thus government needs to intervene with them. Regulation in this area means that the Government will lay down the minimum levels of pollution acceptable, and businesses and individuals must keep within the limits. In many cases, the Government has to decide if the cost of protecting the environment is less than the benefit to be gained and who should carry the cost. Thus, its definition is assisting the reduction of pollution, meanwhile, taking account of economic efficiency.

What are the main instruments of control/reduction/elimination? Legal controls, eg regulations to prohibit, limit. Persuasive guidelines, eg on product design, process control. Financial inducements, eg grants to modernise plants, processes. Financial penalties, eg a tax on products which breach standards set, a tax on firms which use pollution generating processes. Financial impositions, eg higher charges for waste disposal services. –Licensing – Issues for permits to polluters. Polluters pay for a permit, which licenses them to pollute.

Objectives of Transport Policy Efficiency – to ensure that the transport system is working efficiently, providing sufficient roads to ensure on congestion, and thus the efficient movement of goods and services around the economy. Also to avoid the development of a poor infrastructure. Environment – to ensure that the transport system developed does not adversely effect the environment – in terns of noise, pollution, adversely affecting wildlife and plant life. Accessibility – to ensure that all have access to the infrastructure – making transport available and affordable to all – covering the rural areas and all income brackets – this will include subsides/free travel passes for pensioners. Public finances – ensure that tax money is spent in a way which meets public needs – spending money on transport means spending less on hospitals and schools.

Measures to solve road congestion Taxation and Subsidies: one way of addressing this is through taxation and government subsidies. If we tax a good or service then it will become less attractive and the demand should fall. It may also be the case that we can be encouraged to use more environmental forms of transport. Park and Ride schemes. Deregulation: increasing competition within the market. Road Tolls. Congestion Charges. Integrated Transport Systems.

Pigovian tax influencing supply sidemarginal social cost

When pollution and treatment (external) costs are included, less of the good should be produced and it should be sold at a higher price.

marginal private costs

Pigovian Tax

Social cost and optimum

In the presence of a negative externality to production, the social cost of producing aluminum exceeds the private cost. The optimal quantity of aluminum, QOPTIMUM, is therefore sma

ller than the equilibrium quantity, QMARKET.

Pigovian tax influencing demand side

fuel fuel p3 - p1 = tax, p2 – p = tax p2 p3 p p1

fuel fuel

The equilibriums could be changed by using tax.

Tax on fuel and to treat externality1. 2. What is negative externality? Markets fail to overcome it. Much environmental pollution and congestion are caused by vehicles; but the negative externalities must be borne by society as a whole, no matter whether you drive car. A Pigovian tax is considered one of the ―traditional‖ means of bringing some market forces, and thus better market efficiency, to economic situations where externality problems exist. The diagram for this tax. The Government‘s environment policy decides who should pay for the pollution. The more the people drive, the more they should pay for the treatment of externalities, because they cause more externalities. Then impose a tax on them. Goals of the Government‘s transport policy (efficiency and environment).

3.

4.

5.

How tax on fuel influences environment and traffic (1)6. To achieve these goals, the Government excises tax on fuel, which can discourage people to use private transport, and can be used to deal with pollution and congestion. Tax on fuel. Demand side: Tax on fuel is a non-price factor influencing demand curve for fuel. The demand curve shifts to the left, meaning decrease in demand. Because the demand for fuel decreases, private transport will be decreased. More people take public transport. Less consumption of fuel will lead to less environmental pollution, and less traffic congestion.

7.

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