Market Failure - Regulating Demerit Goods

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

Attempts to correct market failure arising from demerit goods

Syllabus: Evaluate, using diagrams, the use of policy responses, including

• market-based policies (taxation and tradable permits), and
• government regulations, 

to the problem of negative externalities of production and consumption

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, Don´t 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 this approach?
  

• 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?