Advantages and Disadvantages of Market Failure Corrections

Taxation – Advantage
Tax that is collected can be redistributed to other sources.
Taxation – Advantage
Solves negative externality – Producer will have to increase prices due to tax, making demand decrease and solving problem of over-consumption.
Taxation – Advantage
Switching to other goods (possibly healthier alternatives) e.g. e cigarettes.
Taxation – Disadvantage
If good is highly inelastic consumer will pay more tax than producer. (Negative externality still exists).
Taxation – Disadvantage
Difficult to determine amount of tax as it is difficult to estimate cost of negative externality. (Too little = no effect; Too much = black market).
Taxation – Disadvantage
Producers may not always pay full amount of tax but share it with consumer.
Subsidies – Advantage
Can help redistribute wealth among society (e.g. winter fuel allowance for over 60s).
Subsidies – Advantage
Solves positive externality – producer can produce for cheaper (lower production costs) so people can consume more (increase in demand).
Subsidies – Advantage
Used to set up businesses in deprived areas or areas where environmental benefit can be gained.
Subsidies – Disadvantage
Hard to allocate where subsidies go and how much should be allocated.
Subsidies – Disadvantage
Local authorities have to decide whether social benefit exceeds subsidies they give. (e.g. empty bus services in rural areas is elderly’s only contact with outside world).
Subsidies – Disadvantage
Some services are still under-consumed although they are subsidised which could waste taxpayers money.
Subsidies – Disadvantage
If good is inelastic, government may have to pay large subsidies for a small change in quantity demanded, meaning the positive externality still exists.
Regulation – Advantage
Makes people think about how harmful a good actually is. (e.g. age limits may deter people from using it).
Regulation – Advantage
Less consumption of good due to consequences of consuming the good, solves negative externality and a decreased use of the demerit good.
Regulation – Advantage
Stops certain sections of society from consuming demerit goods. (people who don’t want to go to prison ect.).
Regulation – Disadvantage
Outright bans may lead to the creation of a black market and the selling of unregulated products which may be more dangerous than the original product.
Regulation – Disadvantage
Hard to decide what regulation to introduce without creating a black market (e.g. what punishment and how much if fines).
Regulation – Disadvantage
Punishment has to be severe enough. (People may find more dangerous substitutes e.g. drugs).