What this lesson teaches
I can explain equity as a fair share of essential goods and services.
Syllabus 8843, 2.2.1(e). Governments' Microeconomic Objectives: Equity occurs when there is fairness in the distribution of essential goods and services
I can explain why a government steps in to improve efficiency and equity.
Syllabus 8843, 2.2.3(a). Microeconomic Policies: Microeconomic policy decisions undertaken by governments to achieve microeconomic objectives in relation to efficiency and equity
I can judge how well each policy achieves efficiency and equity.
Syllabus 8843, 2.2.3(c). Microeconomic Policies: Effectiveness of policy measures in achieving efficiency and equity
Make a guess
A higher petrol tax is meant to cut pollution. Which households pay the largest share of their income in this tax?
- High-income households, because they drive bigger cars.
- Lower-income households who must drive.
- Every household pays the same share.
Show the answer
Lower-income households who must drive.
Fuel takes a bigger share of a low-income household's spending, so the tax takes a bigger share of its income. Who pays is part of judging a policy.
Judge a policy by whether it fixes the cause, what it costs and who is affected, compared with the alternatives.
Start with the cause of the failure, then check whether the policy targets it.
Consider the size of the effect. A tax on a good with inelastic demand cuts consumption only a little. Education takes time to work.
Consider the costs: the tax revenue or spending, enforcement, and the risk of setting the policy at the wrong level.
Consider who gains and loses. A tax on fuel falls hardest on lower-income households. A combination of policies often works better than any one, and Singapore commonly uses a mix of price measures and rules.
- Ask
- Does it target the cause? At what cost? Who gains and loses?
- Often best
- A mix of policies.
Worked example: A noise charge for night deliveries
Night deliveries disturb residents. A single charge per delivery is proposed. But noise differs by vehicle and area, and small shops have fewer alternatives than large warehouses.
- The charge makes firms consider the noise they cause, so deliveries fall.
- But one charge for all deliveries is too high for quiet vans and too low for noisy lorries.
- Small shops may be hit harder than large warehouses.
- A better design might vary the charge by vehicle type or area, or add quiet-hours rules in residential streets.
Watch out for this
If a policy reduces the problem, it is a good policy.
A policy must also be worth its cost, and be compared with alternatives that may work better.
Check your understanding
Demand for petrol is very price inelastic. What does this mean for a petrol tax meant to reduce pollution?
- It will cut consumption sharply.
- It will have no effect at all.
- It will raise revenue but cut consumption only a little.
Show the answer
It will raise revenue but cut consumption only a little.
Right. Inelastic demand means small quantity responses.