Why is Government Intervention Needed?
- In a market failure, the market fails to achieve allocative efficiency and maximum community surplus.
- Government intervention aims to correct this by shifting MPC or MSC curves to match the MSB and MSC curves respectively.
Negative Externalities of Production
- The production of a good or service generates a negative effect on a third party or on society as a whole.
- The goal of the government is to limit or decrease the production in the case of negative externalities of production.
Legislation
- Governments can pass laws regarding environmental standards that firms must comply with.
- For example machinery upgrades, air filters, disposal requirements
Pros
- Easy to apply
- Can have a big impact
Cons
- Cost of production increases
- Possibly leading to unemployment and the costs of enforcing policies
- Legislations might be ineffective
- Legislations might be too harsh or not harsh enough
- Legislations make it more difficult for local firms to compete with competitors who don't have the same legislations to abide by
Carbon Tax
- A carbon tax is a tax levied on the carbon emissions from producing goods and services.
- In cases for production of carbon dioxide which harms the environment.
Pros:
- Government revenue
- Easy to apply.
Cons
- Difficult to measure
- Difficult to calculate tax
Tradable Emission Permits
- Permission to pollute permits that enforce a quota of emissions.
- An eco-friendly firm can sell its permit for profit.
Pros
- Encourages firms to lower cost
- Free market sets price of a permit
- Cooperation among businesses
Cons
- Difficult to set an acceptable level of pollution, difficult to measure pollution
- Incorrect adjustment of permits can lead to adverse effects.
- If too harsh it might be damaging to the economy but if it is too relaxed then it will have little to no effect
Positive Externalities of Production
- The production of a good or service generates a positive effect on a third party or on society as a whole.
- The goal is to increase the production for the benefit of society.
Subsidizing Firms
- The government supports beneficial firms by funding them.
Pros
- Encourages promotion of the industry and lowers costs for firms.
Cons
- The opportunity cost of using government funds.
- May have to give up other things, such as healthcare.
- Risk of reducing competition in the market.
Direct Government Provision
- The government produces the beneficial goods themselves.
Pros
- Government is in full control.
Cons
- High costs and opportunity cost.
- Lack of expertise by the government.
- Private firms discouraged from joining market.
Negative Externalities of Consumption
- The consumption of a good or service generates a negative effect on a third party or on society as a whole.
Indirect Taxes
- Taxes are designed to correct negative externalities called Pigouvian Taxes.
Pros
- Increases the cost of the good quickly.
- Provides government revenue.
Cons
- Addictive goods are demand price inelastic which cause small decreases in demand.
- Creation of black markets.
- Indirect taxes are regressive.
Regulations or Bans
- A regulation or full ban to make the product illegal (such as non-smoking areas).
Pros
- Reduces demand
- Low cost.
Cons
- Slow to implement
- Government spending required
- Difficulties enforcing regulations
- Backlash from consumers regarding free-will
- Potential rise of black markets
- Especially prevalent in drug bans
Negative Advertising
- Government could fund negative advertising such as images on packs of cigarettes.
Pros
- Aims to reduce demand naturally.
Cons
- High cost and opportunity costs for the government
- Studies are unclear on how effective advertising is especially on young adults and teenagers.
Positive Externalities of Consumption
- The consumption of a good or service generates a positive effect on a third party or on society as a whole.
- The benefit to society is larger than the price, thus the government tries to increase production.
Subsidizing Firms
- The government funds firms producing the targeted good.
- The increased supply leads to reduced price.
Pros
- Encourages promotion of the industry and lowers costs for firms.
Cons
- The opportunity cost of using government funds (may have to give up other things such as healthcare). Risk of reducing competition in the market.
Direct Government Provision
- The government produces the beneficial goods themselves.
- The increased supply leads to reduced price.
Pros
- Government is in full control
Cons
- High costs and opportunity cost
- Lack of expertise by the government
- Private firms discouraged from joining market.
Positive Advertisements and Public Awareness Campaigns
Pros
- Aim to increase demand naturally.
Cons
- High costs and opportunity costs
- Might be ineffective towards certain populations
- Lots of research required
Compulsory Regulation
- People are forced to consume the good
Pros
- Shifts demand effectively
Cons
- Government must provide for free
- Anger from residents
- Costs of enforcing law