Government intervention to overcome market failure
1. Taxes On Negative Externalities
DISADVANTAGES of taxes
- Difficult to measure the level of negative externality e.g. what is the cost of pollution from a car?
- If Demand is inelastic then higher taxes will not reduce demand much
- Taxes will cause inequality
- Cost of administration
- Possibility of evasion. E.g. with tax on disposing of rubbish there has been anincrease in fly tipping (illegal Dumping of rubbish)
- May be difficult to decide who is causing pollution
Advantages of Taxes
- Provides incentives to reduce the negative externality such as pollution. E.g. cars have become more fuel efficient
- Social efficiency, 1st best solution.(where MSC = MSB)
- Taxes raise revenue for the govt. This can be spent on alternatives
- See also: Advantages of Electronic Road Pricing
Essays and Revision Notes on Market Failure
