Market Failures Arising from the Production and Consumption of Demerit Goods - Coursework Example

POLICIES THAT MAY BE ADOPTED BY THE GOVERNMENT TO OVERCOME MARKET FAILURES ARISING FROM THE PRODUCTION AND CONSUMPTION OF DEMERIT GOODS Tutor: University: Location: Date: Policies that May be Adopted by the Government to Overcome Market Failures Arising from the Production and Consumption of Demerit Goods Introduction Demerit goods can cause damage to consumers. These goods contain a negative or lower utility that is contrary to what the consumer believes. Examples of these goods include cigarettes, alcohol and other drugs (Geoff, R., 2011, 17). Demerit goods are classified on the basis of a normative judgment. In the definition of demerit goods, it is assumed that consumers are irrational and that they, sometimes, make poor choices by consuming goods that are harmful to their health. The poor decisions might be caused either by lack of knowledge or poor decision making. Poor decision making is often caused by the consumer behavior of under-estimating private costs or over-estimating benefits. Demerit goods are characterized by being harmful to individual consumers and having negative externalities like cost being imposed on third parties. Demerits goods remain the largest single preventable cause of disability and premature death across the world. This, consequently, calls for the intervention of the government to implement policies and programs that will work towards cessation of the consumption of these products in the interests of her citizens. If demerit goods are provided by free market, excluding individuals from consuming them would be impossible. Providing the goods by free market will lower the possibility of withholding the products from individual consumers without restricting them from reaching other members of the public. Once the goods are produced, the marginal cost of an additional person who consumes them is zero. The goods would be open to all members of the public hence displaying the characteristic of non-excludability. A graph illustrating inequality in consumption Reasons that lead to consumption of more than what is good for an individual include planned obsolescence, the product being a basic need and work cycle and spend. Over consuming more than what is good for the society is caused by rapid population increase, consumption competition and ecological bias. One of the causes of overconsumption of demerit goods is planned obsolescence. This is the stimulation of consumer demand by designing low quality goods that wear out after being used for a short while (Neal, M., 2011, 39). This is the major cause of over consumption. Despite the availability of resources, technology and capabilities to manufacture high quality and long lasting products, producers avoid practicing the idea. This is because if they produce long lasting goods they will generate little profits which will lead to their crumbling under the market that will be competition free. Rapid population growth is another reason that causes overconsumption of goods. As the population of human beings increases in numbers, the demand for products also increases. High fertility rates cause a threat to the natural environment as well as the well being of human beings. A graph illustrating demand and supply Some goods are naturally basic needs for human beings. Consequently, their accumulation is dependent on the ability to reproduce and provide for the family. These goods are over-consumed due to the increase in human population. Basic needs always have a high demand since they are required by each individual in the society. People over-consume demerit goods due to consumption competition. They consume lots of goods because consumption has evolved into being a social competition. Individuals engage in consumption competition in order to gain recognition, esteem and status. They consume goods excessively and conspicuously. This is because the lifestyle of consumers has become an important determinant of how they are defined. Social competition in consumption also determines how an individual fits into a community that is socially differentiated. Another issue that leads to overconsumption is the ecological bias. This involves the overuse of the natural capital which includes the earth’s ecological resources (Leesa, F., Bell, D., Keil, R., 2005, 156). This argument is well-known to economists. It involves particular forms of pollution. For instance, corporations pollute air because it is a free resource. The corporations do not have to pay for the damage they cause to the air through pollution. This implies that ecological resources are considered to be externalities or free goods. Therefore, natural resources are different from other goods in the world which demand for labor and capital in their production. The society and the discipline of economics have failed to understand the importance of conserving natural resources. This is because natural resources are over consumed. If human beings leant how to use ecological resources correctly, they would be producing less overall and engaging in more leisure. This is because consumption would cost more compared to free time. Another factor that causes human beings to over-consume is the work cycle and spends. The level of consumption of a particular good or service is determined by the choices made by the individual. The choices include how much to earn which, in turn, influences the amount of income to be earned. People possess the choice of deciding the number of hours to spend at work and those to spend on leisure. The hours spent at work yield income while those spent at leisure entail foregoing income. The amount of income earned during the working hours determines the level of consumption. In this context, the quantity of free time and consumption are determined by an individual’s preferences. Main section Over consumption of demerit goods by individual people causes serious problems for the nation as a whole. For instance, cigarette smoking releases unpleasant smoke into the air (Turlington, C., 2010, 15). This smoke is dangerous to other people who do not smoke because by inhaling it, they become passive smokers. Cigarette smoking also leads to development of cancerous cells and other nasty diseases like emphysema. These diseases lead to inflation of the national health bill. This is because the smokers and passive smokers get infected and therefore seek medical attention. Without the intervention of the government, smokers cannot stop their habit, perhaps because they are addicted. The government plays the role of reducing overconsumption of demerit goods through a number of approaches. Firstly, the government uses market based approaches which impact on the price of the demerit goods. The government also makes use of command and control measures thus affecting the behavior of consumers of the demerit goods due to restrictions. The government also controls the rate of overconsumption of these products by educating the public. Market Based approaches which affect behavior by affecting price Under market biased approaches, the government impacts high taxes on the demerit goods which, in turn, increase their cost. This is aimed at discouraging the consumers of these products from buying them. A lot of demerit goods are always under high demand by their consumers (Daunton, M., 2007, 32). Consequently, the government impacts high taxes on the products for the purpose of reducing consumption while raising revenue. This revenue is needed to provide cash for treating the consumers of these products who often fall ill from fatal diseases caused by the products. High taxation of demerit goods by the government is taken as a health measures. The approach works because when the prices of demerit goods go up, people quit consuming the products or cut down on the amount of previous consumption. However, the approach of impacting high taxes on demerit goods is disadvantaged by smuggling. The high taxes make smuggling of demerit goods a lucrative activity. Smuggling of demerit goods accounts for between 2% and 10% in many nations across the globe. Smuggling benefits both the consumer and the companies that produce the demerit goods. This is because the wholesalers still pay the producing companies for goods that are eventually smuggled. Smuggling also ensures the availability of cheap supply of demerit goods on the market. This helps to keep wavering consumers of the products hooked thereby increasing their consumption. In response to this vise, the government provides guidelines that make it easier for the HM Revenue and Customs officers to work together with the local trading standards to prevent the existence of fake and smuggle demerit goods. A graph comparing demand with price increase Overconsumption of demerit goods in the society begins in the population of the youth and remains a habit into the elder life of those involved. Therefore, in order to reduce overconsumption of these goods, the government should put a halt to their consumption among the youth. By doing this, the government will have managed to stop overconsumption of demerit goods at the infancy stage. Increased taxation is the most effective way of deterring the consumption of these goods at all ages, especially in the youth population. This is an effective method because in order to reduce the prevalence of overconsumption of demerit goods in the society, prevention should be done at the initiation of their consumption. In this case, the habit over consuming demerit goods has been cited as a habit that picks up in adolescence, thus making this age group the initiation stage. Studies indicate that the use of demerit goods begins before high school graduation. This implies that if the government succeeds in keeping adolescents free from the consumption of these goods, most people will never start over consuming them. Consumers of demerit goods are price elastic in their demand for these goods. Young people are the most price elastic in the demand of the goods. Therefore if the government increases the cost of these goods, their consumption level in the society will definitely decrease. The effectiveness of this policy is determined by how price-responsive the targeted group is. Price elasticity represents the level of responsiveness of individuals in relation to demand and changes in price. Another approach that the government may adopt in order to prevent overconsumption of demerit goods is by introducing subsidies (Myers, N., Kent, J., 2001, 28). Subsidies play a great role in reducing the consumption of demerit goods by making the alternative of the products cheaper. However, the policy of introduction of subsidies also encourages the consumption of demerit goods because the given alternative is a product that falls under the same group with the one being discouraged. Nevertheless, the policy should be adapted because many people die as a result of problems caused by demerit goods. The government can achieve this by prohibiting practices that reduce the price of demerit goods with the aim of encouraging their consumption. Command and control measures Intermitted users of demerit goods display substantially fewer and weaker signs of dependence than heavy users. Therefore, in the effort of reducing overconsumption of demerit goods, the government should enforce laws which prohibit the youth from engaging in the overuse of demerit products. This will be a logical strategy that will lead to mitigation of development and sustenance of dependence. The advantage of this strategy is that it can be implemented and adjusted separately. Government laws that lead to increased cost and decreased access to demerit goods would maximize the effort of reducing overconsumption of the products. The government, in the effort of reducing overconsumption of demerit goods, can also reinforce rules that ban the packaging of demerit goods like cigarettes in small quantities (Warner, E., K., 2006, 582). This regulatory action will lead to increased cost of the goods at the purchase point by minimal allowable package size. This is a creative regulation that leads to a further increase in the cost of demerit goods. The approach has the potential to reduce the exposure of young individuals to demerit goods. It also reduces the risk continued overconsumption of demerit goods which eventually leads to dependence following initiation. In the process of preventing the overconsumption of demerit goods, the government can also ban advertisements on the goods on radio, television and magazines (Sahu, K., P., 2003, 268). Examples of these advertisements include those on television that encourage people to smoke cigarettes or consume alcohol. Advertisement ban policy should be undertaken because advertising highly affects the overconsumption of demerit goods. Advertising of demerit goods like cigarettes impacts positively on aggregate consumption of the products. This, in turn, increases the risk of disease infection for individuals who consume the goods. The government should then organize lessons on the importance of advertisement bans to assist people in understanding that the policy is a control strategy to reduce the negative effects caused by the overconsumption of demerit goods. The rule of advertisement burn should be passed by the government because there is no guarantee that the demerit goods are as they are displayed in advertisements. Similarly, there is no assurance that the goods are true according to their labeling. For instance, claims such as “faster acting” and “fresh” could be false. Therefore, to prove the reality behind these statements, the government should request the manufacturers of the goods to include supporting data for the satisfaction of the regulatory agency. In order to reduce the overconsumption of demerit goods, the government should develop a strong regulatory framework. A regulatory framework is crucial for the success in the fight against overconsumption of demerit goods. To facilitate this approach, the government should burn economic activities by other companies that promote overconsumption of the demerit products. For instance, the government should burn the production of light cigarettes and snuff. In order to prevent adolescents from starting the habit of over consuming demerit products, the government should set rules and regulations that prohibit the use of these goods by individuals who fall under the age of 18 years (Pampel, C., F., 2009, 62). The government should also ban the sell and supply of demerit goods to these individuals. These regulations will have a great impact in preventing the overconsumption of the products since many people start consuming them during adolescence. Making the products unavailable to this age group will reduce the number of people who start using the goods. The government can also put a limitation to the amount of demerit products that are sold locally. To effectively reduce the overconsumption of demerit goods, the government should come up with regulations that limit the time of consuming the demerit goods. For instance, laws that regulate the opening and closing times of bars and pubs should be passed in order to limit the time for alcohol intake. To reduce the overconsumption of demerit goods, the government can also prohibit the usage of the products in certain places. For instance, laws can be set against smoking in certain places, especially public places. Places that smoking should be banned include hospitals, clinics, public transport, public libraries, public function rooms, schools, hotels petrol stations and all entertainment outlets. Information/Education/Persuasion Public education on the negative health effects due to overconsumption of demerit goods should be aimed at preventing initial overconsumption of the products. It should also provide correct information about the goods to both consumers and non-consumers. The government can also reduce the consumption of demerit goods by educating the vulnerable groups on the health-dangers that are caused by these goods. It should aim at providing comprehensive education that will create awareness of the harmful effects of demerit products. These can be achieved through the encouragement of campaigns that urge the involved people to change their behavior. Carrying out campaigns is a prevention measure. The approach carries a potential benefit of reducing the progression from low levels of dependence on demerit goods to severe levels. The campaigns should be aimed at persuading individuals to stop over consuming demerit goods. In the campaigns, people should be made aware of the health dangers that are likely to be brought about by the overconsumption of demerit goods (Vidler, C., Grant, S., 2004, 70). The campaigns should also provide information that will stop young individuals from taking up the habit. People already involved in the overconsumption of demerit products should be taught the most effective ways through which they can quit the practice. In order to reduce overconsumption of demerit products, the government should adopt the policy of introducing hard-hitting messages to the public advertising against the goods (Wogalter, S., DeJoy, D., Laughery, R., K, 2005, 265). These messages should be accompanied by a pack of warning graphics, especially the ones that include pictures. This will help to reduce the number of young people who begin over consuming demerit goods. The messages will also increase the number individuals who quit from the overconsumption of demerit goods. Graphic warnings have the ability of persuading consumers of demerit goods like smokers to protect the health of non-smokers. This is because the hard messages displayed by the graphics make them to smoke less while inside their houses. The pictorial warnings also increase awareness of the negative health effects caused by the consumption of demerit products. Conclusion Consumers of demerit goods like cigarettes and alcohol need help to help them stop using the goods. Few people understand the health risks caused by the consumption of demerit products. For instance, a recent survey indicated that only 38% of worldwide smokers knew its negative effects. Many people who are aware of the dangers posed by overconsumption of demerit products are willing to quit. If these people are given professional cancelling and proper medical care, their chances of succeeding to quit will double. It is evident that the government is able to fight and win the war against overconsumption of demerit products if certain measures are put in place. A reduction in the consumption of demerit goods leads to the development of a healthy nation. This is because the consumption of products that have the potential of causing fatal diseases is reduced. Through enforcement of certain rules and regulations, the government is able to achieve harm reduction strategies with focus being put to the youth. Although some problems appear to pose difficult social and regulatory challenges, the government should not give up on them easily. It should strive to find solutions for the problems. The government can also work together with WHO in the fight against the epidemic of overconsumption of demerit products. The WHO conventional framework on the control of overconsumption of demerit products like cigarette started operating in February 2005. Currently, it is one of the treaties that are widely embraced in the United Nation’s history. The treaty covers 88% of the entire world with a total of about 176 parties. The conventional framework of WHO is the organization’s most important tool in the fight against overconsumption of demerit products. The body also plays a role of promoting good public health. The treaties signed by WHO are evidence-based and they give a reaffirmation of the right of citizens to the quality standard of health. Bibliography Daunton, M. J. (2002). Just taxes: the politics of taxation in Britain, 1914-1979. Cambridge: Cambridge University Press. Geoff, R., 2011. Edexcel AS Economics Units 1, 2 & 3 Digital Textbook, New York: Tutor2u Limited. Grant, S., & Vidler, C., 2003. Heinemann economics for OCR. Oxford: Heinemann Educational. Keil, R., Bell, D. V. J., Penz, P., & Fawcett, L. 1998. Political ecology: global and local. London: Routledge. Myers, N., & Kent, J., 2000. Perverse subsidies: how tax dollars can undercut the environment and the economy. Washington: Island Press. Neal, R., M., 2012. America Hanging by a Thread. New York: Authorhouse. Pampel, C., F., 2009. The persistence of educational disparities in smoking. Social Problems. 56, 526-542. New York: Cambridge University Press. Sahu, K., P., 2003. Salesmanship and sales management. New York: Alexander Hamilton institute. Turlington, C., 2010. Lets clear the air: 10 reasons not to start smoking. Montréal: Lobster Press. Warner, K. E., 2006. Tobacco control policy. San Francisco: Jossey-Bass. Wogalter, M. S., Dejoy, D. M., & Laughery, K. R., 2005. Warnings and risk communication. London: Taylor & Francis. Read More