Other Interventions to Address the Market Failure (DP IB Economics)

Evaluation Point

Explanation

Challenges involved in the  measurement of externalities

• Is extremely difficult to calculate the level of CO₂ emissions in an economy and this level constantly changes

• The initial number of permits is based on this calculation and should ideally be significantly less

• If the calculation is too high then the permits will have no impact on emissions whatsoever

Degree of effectiveness

• It still provides a permit to pollute

• When the calculations are correct, it can be effective in decreasing emissions and reducing the welfare loss

• Larger firms have the resources to buy all the permits while smaller firms struggle. Over time this can effectively create monopolies in polluting industries

• If the demand for the end product is price inelastic in demand, then firms will pass on the cost of this permit to their consumers in the form of higher prices

Consequences for stakeholders

• Increased costs of production for firms

• Some firms may invest in new technology so that the permits are not required

• Some firms may no longer be able to compete

• Some firms may switch their production to countries with no pollution permit scheme

• Higher prices for consumers

Advantages

Disadvantages

• Many problems require a globally co-ordinated response and the reduction in welfare loss is greater when countries work together

• Resources can be pooled and used for the greatest good

• Levels of international cooperation and interdependence can increase

• More economically developed countries (MEDCs) have developed using 'dirty technologies'. Less economically developed countries (LEDCs) are under pressure to accept agreements which reduce the use of 'dirty technology' and this may not be realistic as it would decrease their economic growth

• There are usually no legal consequences to withdrawing from international agreements

• When new political parties come to power they may seek to change agreements or withdraw from them e.g. President Trump withdrew USA support for the Paris Climate Change agreement

Advantages

Disadvantages

• Working together can provide a common purpose and build a community

• The community knows how to best manage scarce resources in a sustainable way and it is in their best interests to do so

• Communities can create employment opportunities related to managing the scarce resources

• A powerful strategy that has been beneficial to promoting eco (sustainable) tourism in many areas e.g. Borneo rain forests

• The welfare loss is reduced

• There can be disagreement about how to best manage the resources

• Taking back control of common pool resources from multinational corporations or organised crime gangs can be highly confrontational/violent

• This strategy works better when private property ownership rights are given to the communities for the natural resources around them

Advantages

Disadvantages

• Essential /valuable goods and services are usually provided free at the point of consumption

• They are accessible to everyone regardless of income

• These usually provide both private and external benefits to society

• Paid for through general taxation

• There is an opportunity cost associated with their provision

• Products which are free may result in excess demand and long waiting times e.g. procedures at Public hospitals