• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

IB Economics Commentary on Market Failure

Extracts from this document...


Commentary 3 This article from Newsaday.com, "proposed cigarette tax increase rile smokers in NY" is about cigarette smoking in New York as a cause to market failure. The government tried to tackle the problem of market failure through the implementation of an increase in indirect tax (a tax imposed on spending) In this article, I will evaluate whether the government intervention was effective with its method of eliminating market failure. Market Failure is the failure of an unregulated market system to achieve allocative efficiency (the situation when no resources are wasted) or social goals. In this article there are two causes to market failure: the oversupply of demerit goods (a good which the political process had decided is socially undesirable) and the negative externality of consumption (cost of consumption by society but not the consumers themselves). ...read more.


is relatively inelastic, as smoking has an inelastic demand and MPB = MSB , because there is no benefit involved in smoking. However Marginal Private Cost (MPC) (the marginal cost directly incurred by the producer of the good/service) shifts out as there is an externality that affects the third party, which will be covered through the implementation of a tax. In a free market, people would ignore the external costs to others, therefore the output would be at Q2 where (demand = supply), however this would be socially inefficient as social cost > social benefit. To account for this loss, a tax (S2) is imposed. The amount of tax is P3-P1. The red triangle is the area of dead weight welfare loss. It indicates the area of overconsumption (where MSC is greater than MPC). ...read more.


Furthermore, the main reason for a tax is to achieve social efficiency and if a tax is the method, then so be it. In reality, the awareness of the dangers of smoking have been around for a long time, so it can be inevitably said that people are making informed decisions for when they choose to smoke. However the social cost of smoking is larger with the problems of passive smoking and environmental concerns. Therefore It is absolutely necessary to try and reduce the number of smoker, for the welfare of others and to protect our planet. But, there are alternative methods the government could use which could reduce the number of smokers or decrease the pollution index, but at the same time not defect any other part of the country's economy such as crime rate. Other methods could include regulation of minimum age for smoking, the prohibition of smoking in certain areas. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our International Baccalaureate Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related International Baccalaureate Economics essays

  1. Effects of smoking on Society

    had the lowest risk of contracting the illness (Vastag). Researches from University of Washington in Seattle say that the nicotine component is the likely chemical in the cigarettes which prevents the disease (Vastag). It has also been proven that cigarette smoking can have positive effects to people with mental illness.

  2. Economics Commentary- Market Failure. In the article, the negative externality was the spilling ...

    Moreover, these profit maximising firms are only concerned about the private costs of production, not the social costs they might create through the production of demerit goods. Furthermore, many companies from developed countries move their factories into developing countries like China, because their legal structure is weak, and health and safety regulations are lenient, if at all existent.

  1. Economics IA Commentary - Market Failure. Household energy bills will increase by 50 ...

    In the long run however, as the taxes rise to a sizeable amount, then the deterrent action will ensue; consumers will now be discouraged from consuming carbon based energy and shift to alternative sources. However, In reality this is only partially true.

  2. Growth and Development Problem Set - IB Economics exam questions and answers.

    population at large, especially in rural areas, do not have easy access to banking services. Thus, lack of access to banking services, to some extent, do not allow the participation of people living in rural areas in economic growth. The availability of infrastructure and broad access to the services it offers make major contributions to economic growth.

  1. Market Failure IA Commentary. This article is about the price of cigarettes in Macao ...

    If the government proposal is passed, the local tobacco tax duty will be only 38 percent of the retail cost, while in Hong Kong it is closer to 70 percent.?The chairman of Hong Kong anti-tobacco pressure group Clear the Air shares Chan's view.

  2. What is the impact of the Notional Interest Tax Deduction system on investments in ...

    Company A will be financed only by debt and Company B will be financed with its own resources.

  1. Explain the Main Sources of Market Failure that Can Occur in the Market System ...

    There are negative externalities. Negative externalities can occur a production impose external cost to third person who isn?t given compensation. There is a concrete example of negative externalities. America pollution made by producers and consumers can bring about external costs in Britain.

  2. Economics Project Market Failure

    Also, firms may commit fraud by reducing pollution when checks take place and polluting the environment liberally at other times. 1. High taxes on companies may cause higher unemployment. As the profit margins of private firms decreases they would tend to cut down on costs and thus might make some of their labour force redundant.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work