Additional content for SAC 2 not covered by Flash cards

1. Additional Causes of Market Failure

  • More emphasis on government policy tools:

    • Indirect taxation (used to reduce negative externalities by increasing cost).

    • Subsidies (to promote positive externalities).

    • Government regulations (laws and restrictions to guide market behavior).

    • Government advertising (awareness campaigns to influence demand).

  • Comparison of Public & Private Goods:

    • Public goods: Non-rivalrous & non-excludable (e.g., defense, street lights).

    • Private goods: Rivalrous & excludable (e.g., a Mars bar).

2. Further Breakdown of Externalities

Negative Externalities (Overallocation)

  • Additional Government Responses:

    • Tax incentives for firms to reduce harmful production (e.g., tax breaks for clean energy).

    • Bans or restrictions (e.g., cigarette smoking bans in public spaces).

    • More emphasis on "internalizing" costs – ensuring that producers include external costs in their pricing.

Positive Externalities (Underallocation)

  • Additional Government Responses:

    • "No Jab, No Play" policy – regulation to ensure children receive vaccinations.

    • Tax incentives for R&D – encouraging firms to engage in research.

3. Asymmetric Information & Government Policy

  • Further examples of how asymmetric information leads to market failure:

    • Sellers having more information (e.g., second-hand car sales, misleading advertising).

    • Buyers having more information (e.g., health insurance – those who purchase insurance may know they have a pre-existing condition).

  • Government Responses:

    • Consumer Protection Laws (Australian Consumer Law – Section 18 bans misleading advertising).

    • Mandatory disclosure (requiring companies to provide key product details).

    • Consumer education (advertising campaigns to inform buyers).

4. Common Access Resources & Intertemporal Efficiency

  • More focus on the link between common access goods and sustainable development:

    • Overuse leads to depletion → future generations suffer.

    • "Tragedy of the Commons": When individuals act in self-interest, shared resources get overexploited.

  • Additional Government Responses:

    • Carbon tax (making polluters pay for emissions).

    • Fishing/hunting limits (to prevent depletion).

    • Bans on harmful chemicals (e.g., CFC bans to protect the ozone layer).

5. Government Failure (Unintended Consequences)

  • Definition Expansion:

    • Occurs when government intervention worsens efficiency rather than improving it.

    • Key cause: Policy solutions often create secondary problems.

  • More Case Studies of Government Failure:

    • Jakarta’s "Jockey" Problem:

      • High-occupancy lanes to reduce congestion led to poor individuals becoming "passenger jockeys" for hire.

      • Instead of reducing congestion, it created a new black market for car passengers.

    • Fuel Tax Credit Scheme:

      • Intended to support businesses, but led to inefficient fossil fuel use and higher emissions.

    • Tariffs & Protectionism:

      • Protect local jobs but reduce efficiency by keeping inefficient industries alive.

    • Unfair Dismissal Laws & Moral Hazard:

      • Protects workers from job loss but may reduce employee effort.

  • Illustration of Government Price Interventions:

    • Price Ceilings (Maximum Prices):

      • Example: Prescription drugs.

      • Unintended consequence: Shortages & black markets.

    • Price Floors (Minimum Prices):

      • Example: Minimum wage.

      • Unintended consequence: Higher unemployment.