ch4 policies

GovInterventioninMarketFailureAimsofgovintervention:1. Correctallocativeinefficiency2. Correctinequity(linktoequityifpart(a)askswhygovernmentinterventionisneededinthemarketfor(essentialgood). **Purposeofpolicy(eginternalizeexternality)+Howpolicyachievesallocativeefficiency(whichcurvesareshifted)** DirectVSIndirecttax/subsidy:Direct(onconsumers)shiftsMPB(dd);Indirect(onproducers)shiftsMPC(ss) MFSource Policy Examples Thesis/Antithesis PublicGoods(missingrepresentativemarketdemand) Directprovision(doesNOT=FREEprovision)● Governmentdirectlyprovidesforpublicgoodsbecausetheprivateproducerswillnotprovidethembypayingforitsproduction.● Addressesallocativeinefficiency&leadtomoreequitableoutcomes ProvidefreeTVbroadcastforeducationpurposes(egPBS) NotFeasible:Governmentbudgetconstraints● Needtoincreasegovexpendituretofinancespendingonpublicgoods● incuropportunitycosts NotFeasible:ImperfectInformationFree-riderproblem->missingrepresentativedemand->pricesignalingfunctiondistorted->hardtodetermineactualbenefits&costs->mayoverprovide/underprovide->stillallocativelyinefficientEgUSAoverallocateresourcestodefenseBatamunderprovidestreetlightingSingaporeoverprovidestreetlighting Furthereval:(ratherthansayingsomeprovisionisbetterthannon-provision)thisprocessisnotstaticThroughfeedbackcollectedbythegovernmentthroughobservationsofthemarketandfeedbackfromcitizens,thegovernmentcanadjustquantityofpublicgoodprovided,untilqtyisclosertosocialoptimumqty

Negativeexternality Specificindirecttax- taxamount=MECatQs - IncreaseCOP- Either→IncreaseMPCoffirm→ProducersinternalizeMEC(purpose)- Or→Decreaseprofitability→Decreasesupply→Increasepricestoconsumer→IncreaseMPCofconsumer→ConsumersinternalizeMEC(purpose) HowTaxachievesallocativeefficiency:- (g)IncreaseMPCfromMPCtoMPC+tax(don’tneedtospecifydirectionofshift) - Newprivateoptimumqty(whereMPC+tax=MPB)willcoincidewithsocialoptimumqty- Noover-consumption ERP:anelectronictollcollectionschemetomanagetrafficbywayofroadpricing. SGpollutanttax:TaxoneverytonneofCO2gasproduced [ERP]Effective:SalienceBias● TheIn-vehicleUnit(IU)beepswhenevercarpassesthruERPgantryand$$isdeducted● Driversmoreawareoftax->internalizationofMECmademoreeffective [ERP]Appropriate:ERPcanbeadjustedaccordingtodifferentlevelsofcongestion,atdifferenttimesoftheday→targeteddirectlyatroaduserswhousethecongestedroads [PollutantTaxonMEC]Appropriate:IncentiviseprofitmaxfirmstoinnovatenewwaystoreduceMEC.(reducedMEC=reducedCOP=greaterprofit) NotEffective:PED- Goodhasfewclosesubstitutes&lowproportionofincomespent- Demandispriceinelastic- Increaseinpricecauselessthanproportionatedecreaseinqtydd- Lower Ygrouphvtopayhigher proportionofincomescomparedtohigher Ygrp- Increasedinequity(distributionof Y) NotFeasible:- HardtoassessexactmonetaryvalueofMECatQsduetoimperfectinformation(E1)- Difficulttoaccuratelyassessmonetaryvalueoflossofproductivity(MEC)duetoconsumptionofgood,duetotheintangiblenatureoftheMEC(causeofimperfectinfo)- Govfailureariseswhenthereisovertaxationwhichcausesunderconsumption.ThismayresultinDWLduetounderconsumptionbecauseofover-taxation

- Deadweightlosseliminated- Allocativeefficiencyachieved- Marketfailureaddressed >DWLinanunregulatedmarket. Quota● (d)Referstomaximumlegalquantitythatcanbeproduced/consumed○ priceoflicensingmechanism(egCOE)determinedbydd/ss(marketforces)→allocatedtothosewilling&abletopay○ (g)MPCincreases(forCOE)○ internalizenegativeexternality (Howdoesquotaachieveallocativeefficiency)● setconsumption/productionofgoodtosociallyoptimallevel● EliminatesDWL(purpose) Ban:Extremeformofquota VQS(quota)+COE(licensingmechanism) MustbuyCOEtobuycar:lump-sumpayment,increasesfixedcostofdriving (COE)NotEffective:SunkCostFallacyhighsunkcost(COEprices)->evenwhenMPB<MPC->consumemoreofgood(drivecarexcessively)toreduceaveragecostofsunkcost(COEprice)->Linkbacktomktfailure:endupworseningmktfailurecuzincreaseover-consumption (COE)NotEffective:EquityIfpricesoflicensingmechanismtoohigh->goodlessaffordabletolessrich->inequity NotEffective:Notintrusiveenough?Yes,quotalimitsnumberofgoodsbought,butdoesn’tcontrolhowandwhengoodsareconsumed>difficulttoensureconsumptionisat0Qs Linkbacktomktfailure:Ifcarownersusetheircarsatsametimeandonsameroad,congestionmaystilloccur>doesnotaddressnegativeexternality (ForBan)NotAppropriate:- MECisnotthatsevere- MSCdoesnotexceedMSBforallqtylevels- Govfailure- (g)usual-veextgraph- DWLwithBan>originalDWL- Greaterallocativeinefficiency

- (d)Abanisaformofquotawheregovernmentlimitsquantitytosocialoptimum(Qs),whichis0 (HowdoesBanachieveallocativeefficiency)- (g)Assumeforallquantitylevels,MSC>MSB- Privateoptimum=socialoptimum=0- NoMECisincurred.- Deadweightlossiseliminated.- Allocativeefficiencyisachieved. (Bandiagramis-extdiagramtranslatedinthenegativex-dir)(setQs=0) TradablePermits(accompanyingpolicytoquota)(notgoodtochoosethispolicyif givenachoice–verylengthy)● Quota+licensing+mkt-basedsystem(allowtrading) - Govestimatessociallyefficientoutputandacceptedlevelofpollutantemitted,decidesonqtyofpermitstoissue- Eachpermitallowsfirmstoproduceacertainlevelofnegativeexternalities(pollutant)- Numberofpermitsheldbyfirmsdeterminesfirms’ SGpollutanttradablepermits Sideeffects:- Dominantfirmsmaybuyuppermits- Actsasbarriertoentrycuznewfirmslackpermitstoproducegood

quotaofnegativeexternalitytheycanproduce.- Thesepermitsaretradable.Firmscanbuyandsellpermitsusingpricesdeterminedbymarketforces. - Asthereisopportunitycostofpolluting(moneytheycouldhaveearnedfromsellingexcesspermits),thustheyinternalizenegativeexternality(purpose) (Howpolicyaddressesallocativeinefficiency)- Firmsareincentivisedtoengageinprocessinnovationtoreducepollutionemitted,sothattheycansellexcesspermits- ReducesMEC- QtyproduceddecreasesfromQptowardsQs- Reducesallocativeinefficiency MoralSuasion/PublicEducation- Explainwhyuassumeconsumerswillbealtruistic Positiveexternality Subsidy● Direct/indirectsubsidyamt=MEBatQs,distance…ifsubsidytoreduceinequity,means-testedsubsidy(Rare)Directsubsidy→IncreasesMPB(likeincreasedemand) (Usual)Indirectsubsidy→DecreasesMPC- Decreaseproducers’COP- Either→DecreaseMPCoffirms→FirmsinternalizeMEB(purpose)- Or→Increaseprofitability→Increasesupply→Firmspassonlowercosttoconsumersintheformoflowerprices→DecreaseMPCofconsumers→ConsumersinternalizeMEB(purpose) SGsubsidizesprieducation&healthcare(MediShield). UKFULLsubsidycuztheybelievethathealthcareisafundamentalbasicright,sofullsubsidyismost equitable. SGPARTIALsubsidydonethrough Notfeasible:- HardtoestimatemonetaryvalueofMEBatQsduetoimperfectinfo.(E1)- Difficulttoplaceanexact monetaryvalueontheproductivitygainstoaneconomy(MEB)fromahealthierworkforceduetothedifficultyinisolatingthecausalityeffect of consuminghealthcareonproductivity(Causeof imperfect info).- OverSubsidisation→Overconsumption/production.GovfailurewherebyDWLfromoverconsumptionduetooversubsidization>DWLfromunderconsumptionw/ogovintervention.(Nograph) Notfeasible:Hugeopportunitycost.Subsidycouldhavebeenusedtofinanceothergovspending.Unsustainableinlongrun.Unintendedconsequence;lowerSOLoflowincomegroup

Howsubsidyachievesallocativeefficiency:- MPCshiftsfromMPCtoMPC+subsidy- NewprivateoptimumqtywhereMPB=MPC+subsidycoincideswithQs- Eliminateunder-consumption- DWLremoved- Allocativeefficiencyachieved Subsidycanbeusedtotargetbothpositiveexternalityandimperfectinformationaboutbenefits→cancombinediagram.3benefitcurves.Bottomtotop:MPBperceived,MPBactual,MSB. means-testing,givesmorefinancialhelptothosewhocannotaffordhealthcare.Moreequitable. →EvalforFULLsubsidy:MoralHazard- Consumerstakelesscareofhealthbyengaginginriskieractionsegexcessivedrinking,cuzhealthcarecostsarenotbornebythem.

DirectProvisionGovdirectlyprovidestoincreaseproductiontosocialoptimum. Noteffective:GovisnotprofitdrivenMethodsofproductionmaynotbecostefficient JointProvisionBothgovandprivatefirmssellgoodsIncreasesmarketsupplyDecreasesprice,increasesquantityCorrectsunderconsumption/production Publicandprivatehospitals ^^ MoralSuasion Infofailure→alsocanusesubsidy MoralSuasion/PublicEducation- (How)Govuseeducationcampai