Attempts to correct market failure arising from demerit goodsSyllabus: Evaluate, using diagrams, the use of policy responses, including
to the problem of negative externalities of production and consumption
- market-based policies (taxation and tradable permits), and
- government regulations,
|Demerit goods are over-produced and over-consumed so regulation must be aimed at reducing production and consumption
- Negative Advertising: Blackened
lungs on cigarette packets and Billboards advertising cigarettes, Donīt
Drink and Drive campaigns, leaflets at clinics for drug abuse etc: Can
you use Supply and Demand analysis (Diagram) to show the resired effect
on the market? Try it for yourself now. What problems can you see with
- Taxing the Demerit Good: Remember - I say Tax on a good and you say... Can you draw this diagram? What problems can you see with this approach?
- Quantity controls: Banning
consumption or production has been tried (Think Prohibition of alcohol
in USA in 1920s, Narcotic Laws nowadays). Does this approach work?
Other quantity controls could be quotas - limits on production. Can you
draw this diagram? Can you think of examples? Less
severe regulatory controls might take the form of spatial restrictions
e.g. people may be disbarred from smoking in their place of work, on
public transport and in cinemas and restaurants; there may be time
restrictions in that it may be illegal to sell alcohol during certain
periods of the day, or there may be age restrictions in terms of a
minimum age being stipulated at which young people are permitted to buy
cigarettes and alcohol. Car Parking restrictions are a good example of
quantity restrictions - can you say why or give examples?