Entries Tagged 'markets' ↓

Readers Question: Using data and your economic knowledge assess the case for and against a government completely banning the sale and consumption of cigarettes. AQA (15)

1. Cigarettes are a demerit good. People underestimate the costs of smoking, e.g. lower life expectancy It has been suggested that the true cost of a packet of cigarettes is over $200. Therefore, the government is justified to try and stop people consuming goods which harm them.

2. Cigarettes have negative externalities on the rest of society. For example, it creates health problems of passive smoking. This leads to over consumption and is another justification for banning smoking.

3. In the data it suggests that increasing tax on cigarettes by 200% has only caused a 8.3 % fall in demand. Therefore,  it suggests taxing is ineffective and therefore the government should consider banning it completely.

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Readers Question: what is price control? what is the effect of government price control?

For various reasons governments may wish to intervene in a free market to set prices. Usually prices are set the market forces (where supply and demand differ) But, in some markets governments may want to artificially set different prices.

Minimum Prices.

This is when the government don’t allow prices to go below a certain level. If minimum prices are set above the equilibrium it will cause an increase in prices. The EU has used minimum prices for agriculture. It is argued farmer’s incomes are too low. Therefore, minimum prices have been used to increase prices above the equilibrium. This enables farmers to get a higher income.

However, the big problem is that this creates a surplus. Therefore, the government have to purchase the surplus to maintain a minimum price. The Common Agricultural Policy became very expensive because the minimum prices encouraged farmers to supply as much as possible.

• Minimum prices for Olive Oil
  
• Disadvantages of CAP

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Discuss the difficulties of using Cost Benefit Analysis in deciding whether to build a new international airport. (30)

A Cost Benefit analysis involves examining whether society will benefit from building a new airport. Therefore, the government need to calculate all the social costs and social benefits. This includes calculating private costs and external costs, as well as private benefits and external benefits.

Difficulties include

1. Placing a monetary value on external costs and external benefits.

For example, an external cost of a new airport is increased pollution from more flights. However, the exact cost is difficult to measure because we are uncertain about the implications of global warming. The new airport may also involve building on greenbelt land. This means that local wildlife will suffer. The importance of local wildlife and the environment is very subjective. e.g. if you asked a questionnaire would give very different answers.

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READERS QUESTION: how low price can affect the market?

This depends on several factors. Firstly it depends why there is a low price in the market.

1. Increase in supply, inelastic demand.

Many agricultural markets have an inelastic demand. For example, if the price of potatoes falls, people won’t particularly want to eat more potatoes. Therefore, if there is an increase in supply of potatoes we get a fall in price, but, only a very small increase in demand. Therefore, this leads to lower revenue for potato farmers.

Diagram for inelastic Demand 

If the low price continues for a long time, farmers may go out of business. As farmers go out of business supply will fall and the price will start to rise.

However, agricultural markets are often volatile, low prices may be followed by high prices the next year. Therefore governments often try to buffer farmers incomes during periods of low prices (this is the rationale behind the CAP)
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