2.8-9 government interventions

merit goods

goods associated with positive externalities of consumption

demerit goods

goods associated with negative externalities of consumption

market failure

occurs due to an inefficient allocation of resources

public goods

goods and services that are non-rivalrous and non excludable

advantages of laws and regulation

effective in reducing externalities from a command and control approach

disadvantages of laws and regulation

1. monitoring and enforcing costs incurred by the government

2. people may choose to break the laws if penalties are not significant

3. political pushbacks

RWE of laws and regulation

1. HK gov - legal age of buying alcohol / cigarettes

2. HK gov - forced vaccination / masks

advantages of policies on common pool resources (fish)

significantly reduce the amoubt of fish to be caught

what are the three regulations on common pool resources

regulation, indirect tax, permit to fish

RWE of interventions on common pool resources

1. fishing moratorium

2. fishing quota

disadvantages of interventions on common pool resources

1. no income for fishermen the government will have to support them

2. fishermen might switch to other industries

advantages of education

1. effective campaigns may change consumer behavior for the long term

2. more permanently modify consumers' behavior

disadvantages of education

1. opportunity cost of government's budget

2. requires time for the message to be accepted and behavior to change

3. education campaigns only encourage people to change, effectiveness may vary

RWE of education

1. choice magazine

2. smoking campaigns

advantages of direct provision

more accessible to everyone regardless their income level

disadvantages of direct provision

1. no profit incentive not reduce wastage during production

2. risk of government failure (consumers may over consume)

advantages of indirect tax

1. tax revenue is generated

2. price increase decreases production

tax revenue generated from indirect tax

1. compensate victims

2. other measures which can help reducing the consumption

3. subsidize the substitute of the good

disadvantages of indirect tax

1. regressive - low income groups pay a higher portion of their income

2. ineffective with goods with inelastic PED

RWE of indirect tax

HK gov - $3.3 per cigarette

advantages of subsidies

1. incentivizes production and consumption

2. reduces the price of the good, increasing its affordability to lower income groups

disadvantages of subsidies

1. imperfect market information

2. effectiveness is dependent on PED

3. opportunity cost

RWE of subsidies

HK gov - university education $45k annually