Main forms of microeconomic policy strengths weaknesses

methods
Regulation: 1. do not increase tax burden 1. difficulties/costs of enforcement
e.g. ban on smoking and drinking in public 2. relatively simple to implement (compared to 2. lack of government revenue
places, age limit, warning on packaging, market-based policy) 3. politically unpopular
pollution permits, length limit of fishing 3. addressing directly the consumption of 4. reduce producer revenues demerit goods
demerit goods and reduce the income for workers in certain
4. completely ban is highly effective in industry
reducing consumption of addictive demerit 5. underground parallel market
goods
Direct provision: 1. directly provide public goods and merit 1. costly for government/budget deficit
e.g. state provision of public goods (street goods to reduce market failure 2. political conflicts
lights), merit goods (education/healthcare), or 2. directly provide essential goods to ensure 3. opportunity cost of spending on others
essential goods (food/housing/public income equality 4. national debt increases to finance the
utilities/public transport) 3. reduce misallocation of resources due to public spending
moral hazard 5. the difficulty of analysis on the social costs
4. economies of scale on the project and benefits
6. restricted by nature of product (PES)
Indirect tax: 1. raise revenues for government 1. limited by PED/PES
e.g. GST(general sales tax), VAT(value added 2. a wide base on G&S/ easy to collect 2. depend on the size of tax
tax), tariff/duties 3. discourage consumption of demerit goods 3. black market (tax evasion)
4. reduce negative externalities 4. regressive tax, leading to inequality
5. protectionism on trade 5. cost-push inflation
6. deadweight loss
Subsidy: 1. increase in CS, PS 1. government budget deficit
e.g. on producers to increase equality, or on 2. ensure income for low-income producers 2. opportunity cost
merit goods to encourage consumption, or on 3. encourage consumption of certain G&S 3. inefficient firms, less incentive to be cost-
domestic producers to protect them from 4. protectionism effective
foreign competition. 4. deadweight loss

Education or Advertising 1. increase in consumption of merit goods 1. persuasive approach on behavior, not
(HL: Nudge) 2. reduce consumption of demerit goods government forces, uncertain effect.
e.g. warning on labelling of cigarette: smoking 3. reduce moral hazard and adverse selection 2. Time consuming to take effect
damages your health due to asymmetric information 3. Costly/ government budget deficit
Price ceiling 1. Encourage consumption on merit goods 1. Shortage in the market
e.g: Gasoline price caps in 1970s: the US Gov 2. Protect low-income consumers 2. Black market: illegally sell high price
imposed price ceilings on gasoline due to 3. Control inflation 3. Queuing or waiting list (non-price
soaring oil prices rationing)
Drug price caps in 2022: President Biden 4. Distort price mechanism
signed the inflation reduction act 5. Lowe quality on products
6. PS reduction, and CS is uncertain
 Buffer stock scheme: Gov sells the stock to
offset the shortage in the market
Price floor 1. Discourage consumption on demerit 1. Limited by PED
e.g: EU Common Agricultural Policy (CAP): the goods 2. Informal market: illegally sell low price
EU sets minimum price for various agricultural 2. Protect low-income producers 3. CS reduction and PS is uncertain
products to ensure farmers’ income. 3. Protect low-income workers 4. Surplus, wasteful of resources
Labour market: minimum wage to protect 4. Protect domestic producers on imports 5. Higher price for poor, regressive and
low-income workers inequality
6. Ineffective price control (degree of price)
7. Inefficient firms
8. Depend on the ability of Gov to enforce
 and maintain the price control
 Buffer stock scheme: Gov buys the surplus
into the stock to reduce waste.
Pollution permits 1. Reduce externalities from pollution 1. Monopoly power for a few large firms
e.g: EU Emissions Trading Scheme (EST): it was 2. Reduce climate change and global which may hold a significant number of
established to combat climate change by warming pollution permits
reducing green house gas emissions. It covers 3. Ensure sustainability 2. Speculation opportunity
various industries, including power generation, 4. More certain effect than indirect tax 3. Inaccurate estimation
manufacturing, and aviation. Or more predictable on controlling 4. Lack of flexibility
China’s National Carbon Emission Trading outputs.
Market: trading market to carbon 5. Incentives for innovation
development and improve efficiency.
Property rights 1. Reduce depletion of resources on 1. Costly monitoring
e.g: land ownership or clearing/extension of common pool resources 2. Complex legal costs
property rights 2. Encouraging collective self governance 3. Difficult to measure the external costs
River pollution control: by enforcing the 3. Enabling of trading of property rights 4. Unclear subject definition
private firm purchase the river or lake to 4. Long-term incentives for innovation
internalize externality
Noise pollution in residential areas: some
property management or homeowners’
committee claims for limiting construction
hours or installing sound-insulation devices
Other interventional methods:
International agreement to reduce externalities
Contracting out to private sectors to provide public goods
Private response to asymmetric information signaling and screening
Main forms of policy methods to reduce strengths weaknesses
income and wealth inequalities
Progressive tax (direct tax)
e.g. personal income tax, corporation income
tax, wealth tax
Indirect tax
e.g. sales tax, VAT, tariff or duties

Investment in human capital (education)

e.g. education, training and development,
heathcare, migration

Transfer payments
e.g. pensions, unemployment benefit, child
benefits

Targeted spending on goods and services

e.g. food coupons, housing for homeless

Universal basic income

e.g. it is a system where all individuals in a
society receive a regular, unconditional sum of
money from the government
Policies to reduce discrimination
e.g. education campaigns, strengthen law
enforcement, promote equal employment
policies, public services
Minimum wages
e.g. a standard wage which is set above
market equilibrium wage to protect low-
income workers: national level, or regional
level
Main forms of macroeconomic policies strengths weaknesses
Fiscal policy 1. actual and potential economic growth 1. Crowding out
e.g. taxes and government spending (New classical model)

2. LR Phillips curve
2. Keynesians multiplier effect

3.Automatic stabilizer
Monetary policy 1. Quantity theory of money 1. Velocity of money
e.g. interest rate, money supply
HL: minimum reserve requirement, central
bank minimum lending rates, open market
operation (QE)

2. Liquidity preference theory 2. Liquidity trap

(Dm and Sm)

3. Transmission mechanism
Supply-side policy 1. interventionist policy
e.g. taxes, subsidies, government spending on
infrastructure, technology improvement,
labour market reform, trade liberalization,
anti-monopoly regulation, privatization,
deregulation,

3. market-based policy
(1) policies to promote competition

(2) labour market polices

(3) incentive-related polcies

Protectionism
1. tariff

2. quota

3. subsidy
4. embargo

5. administrative burden
Main forms of policies to reduce barriers for strengths weaknesses
development or promote growth