Microeconomics

Table of Contents

1. Topic pack - Microeconomics - introduction
2. 1.1 Competitive Markets: Demand and Supply
3. 1.1 Competitive Markets: Demand and Supply - notes
4. 1.1 Competitive markets - questions
5. 1.1 Competitive markets - simulations and activities
6. 1.2 Elasticities
7. 1.2 Elasticities - notes
8. Section 1.2 Elasticities - questions
9. Section 1.2 Elasticities - simulations and activities
10. 1.3 Government intervention
11. 1.3 Government Intervention - notes
12. 1.3 Government intervention - questions
13. 1.3 Government intervention - simulations and activities
14. 1.4 Market failure
15. 1.4 Market failure - notes
    1. The meaning of externalities
    2. Types of externalities
    3. How do externalities affect allocative efficiency?
    4. Negative externalities of production
    5. Negative externalities of consumption
    6. The economic theory of traffic congestion
    7. Demerit goods
    8. Government responses - demerit goods
    9. Possible government responses to externalities
    10. Direct government provision
    11. Extension of property rights
    12. Taxes and subsidies
    13. Tradeable pollution rights
    14. Regulation, legislation and direct controls
    15. Positive externalities of production
    16. Positive externalities of consumption
    17. Merit goods
    18. Why might merit goods be underprovided by the market?
    19. Government responses - merit goods
    20. Public goods
    21. Common access resources & sustainability
    22. The tragedy of the Commons
    23. Common access resources in practice
    24. Sustainability
    25. Threats to Sustainability
    26. The threat to sustainability from the use of fossil fuels
    27. The threat to sustainability from poverty
    28. Government responses to threats to sustainability
    29. Cap and Trade Schemes
    30. Promoting Clean Technologies
    31. The 'dirty side' of cleaner technologies
    32. International responses to threats to sustainability
    33. Asymmetric information
    34. Abuse of monopoly power
    35. Inequality
16. Section 1.4 Market failure - questions
17. Section 1.4 Market failure - simulations and activities
18. 1.5 Theory of the firm
19. 1.5 Theory of the firm - notes (HL only)
20. Section 1.5 Theory of the firm - questions
21. Section 1.5 Theory of the firm - simulations and activities
22. Print View

Government responses - demerit goods

Possible government responses to correct market failure arising from demerit goods

• The government may attempt to reduce the consumption of demerit goods such as cigarettes, alcohol and addictive drugs through persuasion; this is most likely to be achieved through negative advertising campaigns, which emphasise the dangers of drink-driving, drug abuse etc. The aim here is the opposite of normal commercial advertising, namely to shift the demand curve for demerit goods to the left.
• A contraction of demand (movement along the demand curve for a demerit good) could be achieved by the imposition of a tax on the demerit good. This would have the effect of shifting the supply curve to the left, raising the price and reducing the amount consumed. If the government could accurately assess the value of the marginal external cost caused by the consumption of the demerit good e.g. in figure 1, it is the vertical distance XY, a tax equivalent to this could be imposed, and a socially optimum outcome could be achieved. However, in practice, ascribing an accurate monetary value to negative externalities is extremely difficult to do, and the demand for such goods as cigarettes and alcohol is often highly inelastic, so that any increase in price resulting from additional taxation causes a less than proportionate decrease in demand.
• The government may use various forms of regulation. In its most extreme form, regulation could be used to impose a complete ban on a demerit good, such that its consumption is made illegal; for example, the Prohition Laws in the USA in the 1930s criminalised the sale and consumption of alcohol, as does the law at the moment in Saudi Arabia; also in the UK and many other countries today anyone found guilty of selling or consuming heroine can be imprisoned. However, the effect of such regulation is rarely to completely eliminate the market for the demerit good; rather, it is usually driven underground in the form of an unofficial or hidden market.

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.