regulation and subsidies

how do regulations work

a government uses legal restrictions on certain products or at certain times to correct consumption of products with external costs

what are 4 examples of regulation

1. compulsory seatbelts

2. age limits

3. driving fines

4. legal ban

advantages 4 regulation

1. simple and easy to understand

2. when the danger is great, it may be better to ban all together

3. a legal ban sends a clear message

4. it is more fair as it bans every income levels

disadvantages 3 regulation

1. it may be socially inefficient to ban everything

2. increased arrests and detentions

3. costly and dossnt generate revenue

how do subsidies work

they lower the cost of production for firms which causes an outward shift in supply, a lower equilibrium price and market price

Advantages 2 subsidies

1. increases consumption of merit good as price falls

2. socially efficient level of output

disadvantage 4 subsidies

1. it is expensive and may require high tax rates

2. difficult to estimate positive externalities

3. giving firms subsidies may encourage inefficiency as they might rely on money instead of lowering cost curves

4. if the product has a negative PED then there will be a disproportionate change in consumption