Please answer all parts presented If a well-informed person uses a large discoun
ID: 1125544 • Letter: P
Question
Please answer all parts presented
If a well-informed person uses a large discount rate when it comes to decisions about energy- saving devices, i.e. they do not value future energy savings very much, they are (highlight one: more likely/less likely) to invest in such devices 8. 9. If the decision of the person in Question 8 is to not invest in energy-saving devices, would you call this a market failure? (Highlight one: Yes / No) 10. Based on your answer to Question 9, what form of government intervention, if any, should be imposed on this person?Explanation / Answer
8.
The market failure occurs when the market fails to achieve economic efficiency. The economic efficiency occurs when marginal benefit from an economic activity is equal to its marginal cost. The two criteria for economic efficiency are:
When a well informed person uses large discounting and underestimate the energy efficient use of resources, he is less likely to buy an energy efficient product in current period.
9.
In this case, the market fails to generate efficient allocation of resources overtime. That is the cost of using energy efficiently increases for the society. Thus the market failure occurs.
10.
market failure is a spillover cost to the society that causes inequality and distorts the allocation of resources. Government therefore regulates market by the standard approach and incentive based policies. With the standard approach, the government can set a maximum acceptable level of energy and whoever exceed this level are punished by the means of fine. On the other hand, the incentive-based regulation schemes are subsidy to buy energy efficient products.
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