ILO
Evaluate the effectiveness of using minimum pricing as a solution to market failure.
Minimum Pricing
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A minimum price is set above the equilibirum.
The increase in price creates a disequilibrium trough a shortage (S>D) The rise in price leads to a movement along the demand curve from B to A. Reducing the level of consumption. Now the economic agents are paying a greater PC which should reflect the EC that they generate |
Advantages> Raising the price is an effective means of reducing consumption as it impacts consumers willingness and ability to buy the demerit G/S.
> Tax receipts from VAT or excise duty where the indirect tax is a percentage of the selling price will rise. This will allow for greater expendicture on merit goods and services. > A minimum price can target markets where the nature of production and supply encourage excessive demand such as 3 bottles of wine for £10, or happy hours. |
Disadvantages> It'll lead to greater levels of inequality and poverty, as it takes up a greater percentage of income for low earners.
> Create black markets or encourage home production. This can lead to an EC and MF will still exist. > Identifying an effective price is difficult as many demerit goods and services are price inelastic. Therefore an increase in price will lead to a less than proportional fall in demand. |
Home Work:
| tesco_backs_minimum_price_for_alcohol_sales.doc |