12. In each of the following situations, explain how government
intervention could improve society’s welfare by changing people’s
incentives. In what sense is the market going wrong?
a. Pollution from auto emissions has reached unhealthy levels.
b. Everyone in Woodville would be better off if streetlights were
installed in the town. But no individual resident is willing to
pay for installation of a streetlight in front of his or her
house because it is impossible to recoup the cost by charging
other residents for the benefit they receive from it.
thank you
a. The government could impose higher taxes on cars that emit unhealthy emission levels. Both the companies and the car owners could be subject to this tax.
b. Street lights are a city/town service. All building owners should be taxed for this service.
Correction: All PROPERTY owners should be taxed for this service.
Because of "externalities" the market is unable to allocate optimal amounts of driving or street lights.
In a) a person personally bears a very tiny cost due to the auto pollution he produces. However, everybody else must bear this cost as well. The cost of pollution, in society, is not borne by the producer.
Ditto but in reverse for b) The personal benefit from a person's own street light is small. however, everybody in the neighborhood benefits.
a. In the case of pollution from auto emissions reaching unhealthy levels, government intervention could improve society's welfare by changing people's incentives. One way the government can intervene is by implementing pollution control regulations or standards for automobile manufacturers. By setting legal limits on the amount of pollutants emitted by vehicles, the government can create incentives for manufacturers to develop and produce cleaner and more environmentally-friendly automobiles. This intervention would change the incentives for automobile manufacturers by making it necessary for them to invest in research and development to create less polluting vehicles. As a result, society's welfare would improve as the overall pollution levels decrease, leading to cleaner air and better health for the population.
In this situation, the market is going wrong because there is a negative externality present. Auto emissions cause pollution, which has adverse effects on society's well-being. Since individuals or companies producing these emissions do not bear the full cost of the pollution they create, they have no incentive to reduce emissions or invest in cleaner technologies. This results in an inefficient outcome where pollution levels remain high and harm society.
b. In the case of streetlight installation in Woodville, government intervention could also improve society's welfare by changing people's incentives. Even though everyone in Woodville would be better off if streetlights were installed, no individual resident is willing to pay for the installation in front of their own house because it is impossible to recoup the cost from others.
In this situation, the market is going wrong due to a lack of market mechanisms to address the problem. The installation of streetlights is a classic example of a public good, which is non-excludable and non-rivalrous. Since individuals cannot be excluded from benefiting from the streetlights once they are installed and one person's use of the streetlight does not reduce its availability to others, there is no private incentive for any individual to pay for it. This results in a market failure, where the good that is beneficial for society as a whole is not being provided by the market.
Government intervention can solve this by financing the installation of streetlights through the collection of taxes or fees. By doing so, the government can internalize the positive externalities associated with streetlights and overcome the free-rider problem. Through taxation, the government can collect funds from all residents, ensuring that the costs are distributed fairly and enabling the installation of streetlights. This intervention aligns individual incentives with society's welfare and ensures that the public good is provided efficiently.