Government intervention

indirect taxes, subsidies, maximum prices, minimum prices, tradable pollution permits, state provision of public goods, provision of information, regulation

internalise the externality

incentive to reduce pollution, source of revenue for government, few administrative costs

ineffictive in reducing pollution if demand is price inelastic, difficult to quantify the external cost, increased business costs

to encourage production so that the socially optimum level is reached

reduction in cost of production so suppliers can lower prices, incentive for people to increase consumption, might help reduce inequality

cost to the taxpayer providing the subsidy, ineffective in increasing consumption if demand is inelastic, difficult to quantify the external benefit

below the equilibrium price

enables consumers on low incomes to afford the product, prevents an increase in teh country’s rate of inflation, prevent exploitation of consumers by monopolies

shortage of products resulting in a black market, producers might exit the market, significant cost to taxpayers if subsidies are introduced

a price set by the governemtn which is guaranteed to producers

commodities, consumer goods, labour market

producers know in advance what price they will receive for their product, greater certainty enables producers to plan investment and output, prevent exploitation of producers by wholesalers and retailes who have significant buying power

surplus if MGP is set too high, cost of storage which must be borne by taxpayers, encourages over-production which can result in the inefficient allocation of resources

rights to sell and buy actual or potential pollution in artificially created markets

scheme works through market mechanisms, incentive for firms to reduce pollution, low administration costs, planned reduction in pollution over time

pollution will continue, large firms can buy up the permits and continue to pollute, need to be internationally enforced to be effective, can make a country’s goods less internationally competitive

can limit the amount of pollution, acts as incentive to producers to develop new technologies that reduce pollution, can limit external costs without an impact on price

cost of enforcement, difficult to determine the socially efficient level of pollution, limits consumer sovereignty

when government intervention results in a net welfare loss

distortion of price signals, unintended consequences, excessive administrative costs, information gaps