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)- Govfailureariseswhenthereisovertaxationwhichcausesunderconsumpti