I DO NOT have any special knowledge at all about which questions will be in your January exams. However, it seems to me that for Unit 1 we must remember the title of the module - "Markets and Market Failure".
One of the many results of the Credit Cruch has been a lot of doubt about arguments in favour of free markets. In the past 15 or so years, the common belief was that financial markets should be as free from government intervention as possible. You only have to look at the current economic situation to see why many economists have argued that market failure has resulted.
Additionally, we all know that environmental considerations are key issues of our time. For these problems, there is a debate about whether free market or government led solutions will be the most effective.
Therefore, being able to discuss the advantages and disadvantages of free markets, and the advantages and disadvantages of government action, should be an important part of your Unit 1 revision.
Here is a sample of a question related to this topic:
Using the data and your economic knowledge, evaluate the effectiveness of using the market mechanism to solve environmental problems.
I suggest we try and work on this question together, so please comment below on how you would try and answer this.
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if we rely on the market mechanism :
ReplyDelete- when the natural resouces near depletion, the price charged will be higher and therefore there will be less consumption by firms. however, it's possible that some households might not be able to afford some necessities (eg. oil for heating and everything..)
in the long run there will be a shortage if the rate of depletion of these scarce resouces is faster than the rate of providing them..
- if the market is relatively competitive,some individuals might, with a prospect of the potential profits, carry out R&D and bring innovation to the society (like hybrid cars and bio-fuel). this might be environmentally friendly and also less costly for production. to stay competitive, some firms might change their production that makes use of them as it would costs less. However, it might take long and cost much to switch the damand to producing in environmentally-friendly way.
If it costs much, firms might not be so commited to alter anything and this might not be so effective.
Yes, I agree with the points you make here.
ReplyDeleteSome other considerations:
> Free market prices are "wrong" in the sense that they do not take 3rd party costs into account. Some government action is necessary to adjust these prices.
> A pro-free market approach to this is carbon trading. A price is put on something that was previously free - the right to pollute. Forces of supply and demand then allocate pollution permits and adjust their price. Therefore the costs of producing something now takes into the costs of pollution caused.
> However, as the credit crunch has shown, unregulated free markets cannot be relied upon to work effectively. In particular, the existence of large powerful firms can prevent efficiency.
> A policy like a carbon tax is a more government centred approach. An advantage of it is that it is considerably less complex than carbon trading.
> However, one major difficulty with government actions about the environment is that the problems are often international. We seen only recently with the Cophenhagen summit the failure of governments to be able to work together to secure effective agreements about climate change. It is one of those areas where political needs often take priority over the best solution in terms of economics.