Pollution is caused when consumers or producers make decisions based on self-interest. This is a sign of market failure. With the help of a diagram, evaluate the extent to which government policies should rely upon market forces to address this market failure.
Exam No：9708_w23_qp_43 Year：2023 Question No：2
Answer:
Knowledge points:
3.2.1 impact and incidence of specific indirect taxes
3.2.2 impact and incidence of subsidies
3.2.3 direct provision of goods and services
3.2.4 maximum and minimum prices
3.2.5 buffer stock schemes
3.2.6 provision of information
7.3.1 definitions of productive efficiency and allocative efficiency
7.3.2 conditions for productive efficiency and allocative efficiency
7.3.3 Pareto optimality
7.3.4 definition of dynamic efficiency
7.3.5 definition of market failure
7.3.6 reasons for market failure
7.4.1 definition and calculation of social costs (SC) as the sum of private costs (PC) and external costs (EC), including marginal social costs (MSC), marginal private costs (MPC) and marginal external costs (MEC)
7.4.2 definition and calculation of social benefits (SB) as the sum of private benefits (PB) and external benefits (EB), including marginal social benefits (MSB), marginal private benefits (MPB) and marginal external benefits (MEB)
7.4.3 definition of positive externality and negative externality
7.4.4 positive and negative externalities of both consumption and production
7.4.5 deadweight welfare losses arising from positive and negative externalities
7.4.6 asymmetric information and moral hazard
7.4.7 use of costs and benefits in analysing decisions (knowledge of net present value is not required)
8.1.1.1 specific and ad valorem indirect taxes
8.1.1.10 nationalisation and privatisation
8.1.1.11 provision of information
8.1.1.12 behavioural insights and ‘nudge’ theory
8.1.1.2 subsidies
8.1.1.3 price controls
8.1.1.4 production quotas
8.1.1.5 prohibitions and licences
8.1.1.6 regulation and deregulation
8.1.1.7 direct provision
8.1.1.8 pollution permits
8.1.1.9 property rights
8.1.2.1 government failure in microeconomic intervention
8.1.2.2 definition of government failure
8.1.2.3 causes of government failure
8.1.2.4 consequences of government failure
Solution:
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