points that i missed out

Awww>.<...today we did a question related on government intervention to correct market failure, that`s the evaluate question i did yesterday, they are similar and i found out some of the points i missed out.

• Black market which totally avoid taxation.
• The cost of collecting and enforcing the tax could be significant
• Taxes may lead to lower growth and therefore damage the economy
• To be effective, such tax should be applied internationally.
• By raising firm`s costs of production, it could leads to higher unemployment.

i will focus on market imperfection and write another evaluate question later on.

Using regulation to correct market failure.

Regulation is the legal restriction implement by government,such as banning chewing gum in Singapore, restriction on sales of demerit goods such as alcohol, tobacco and etc. There would be market failure as if it left to the market, it will be over consumption and production. People tends not to be aware of the harmful effect or negative externalities.(Diagram of external cost did not take into account) .

By restricting on the sales of demerit goods, people tends not to buy them as much as before if it work in fulls. AS would shift to the left, and AD contract. In the case of alcohol, the accident after over consume alcohol could reduced, less fighting and crimes after people get drunk which provide stability of the society.(could write one more examples)

However, the level of regulation to be set is difficult to measure, the setting level must be equal to the external cost which is extremely hard.If the regulation is too harsh, it would demotivate industries to work which may slowdown the economy. Or the regulation is too low, it would not have the necessary effect to correct market failure.There is black market that does not follow the regulation most of the times. And there are people taking the risks to break the law.The cost of the regulation to be put into action may be significant. Effective regulation need to be international.

Using tradable permits to correct market failure.

Tradable permits is a permit that allow the owner of the factories emit a certain amount of pollution , it could be sold or transfer to another polluter. Tradable permit is specially design for market failure caused by pollution.

Pollution level need to be strictly controlled, as too much pollution is harmful to environment, it would bring down our standard of living, it could cause diseases or even natural disaster.The factories produce without taking into account all the external cost.A tradable permit would achieve a desired environmental outcome with the country`s maximum level of permitted emissions.

However, it is hard to decide the number of permit should issued and the level of pollution the factory is allow to emit.It would be costly to have the permit to work,as it would increase the cost of production, it would damage the economy or lead to cost push inflationary pressure.There are always some people emit pollutant without a permit/ illegally.