Discuss to the extent to which regulations alone can be used to correct market failure
associated with the sale of fast food. ( 2012 )
Regulations are usually laws and rules that the government sets to discourage or
reduce the consumption of a good. Market failure occurs when the free market
mechanism fails to achieve economic efficiency. In this case market failure has occurs
because there hasn't been allocative efficiency since consumer welfare has not been
maximised as more people are getting obesity problems because of fast foods.
Regulations may help to correct market failure because a regulation to force firms to
put calorie content on the packaging may help to put people off from eating fast food.
This is because they would be more informed about how much calorie they are taking
in from consuming the burger for instance. This helps to reduce the information
failure which has caused market failure as people are now able to make better
decisions which maximise their welfare. Also, the market failure occurring from over
consumption of the demerit good (fast food items) would also be addressed as there is
likely to be a decrease in demand.
However, despite this people may ignore the calorie content on the packaging this
would mean that regulations are not effective enough to correct the market failure.
Additionally , despite it being cheap to introduce a regulation it can be expensive and
hard to actually enforce the regulation. The government would have to employ people
who go around and monitor if firms have put the calorie content in their packaging.
This can take a long time and can be expensive as the monitoring people need to be
paid. This can act as an opportunity cost since the government could use the wages
that they are giving the monitoring people as a way of solving the problems such as
obesity which have been created because of the consumption of fast foods.
On the other hand, a regulation on a ban of the toys which come with the happy meals
may also be seen as an effective solution to correct the market failure. This is because
if firms stop selling the toys with the 'happy meals' then fewer kids are likely to ask
their parents to buy them the happy meal. This is because the plastic toys actsas a
form of advertisement for the 'happy meals' and if there is no advertisement aimed at
kids then the demand for the happy meals is likely to be lower This may help to
correct market failure as it would mean that fewer kids would be consuming the
unhealthy fast foods which means that in the long term they are more healthier and
therefore there is less strain on the NHS in the long term. A healthier population will
help to increase productivity which is good for the economy.
Despite this, parents may still buy fast food for their kids and themselves because fast
foods tend to be relatively cheap. This would mean that the ban on the toys would
have no impact on the demand for the fast foods meaning that market failure is not
addressed. Also, the demand for fast foods may be inelastic as they are usually
addicting and are a cheap and fast way of getting rid of hunger.
On the other hand, an introduction of an indirect tax on fast foods may be seen as
more effective. This is because an introduction of an indirect tax such as VAT on fast
foods would lead to an increase in costs of production of firms. This increase in cost
of productions may lead to a decrease in supply as the firm would want to keep their
profits at a constant. (I would draw the demand and supply diagram and show how
supply would decrease). Quantity would fall from Q to Q1 and prices would increase
from P to P1. Also, the increase in price may also lead to a decrease in consumption.
This policy would addresses the market failure occurring from both over production
and over consumption. Additionally, the firm would now be taking the external costs
that fast food leads to which helps to reduce market failure as the costs would now be
internalised. Also, the government can use the additional tax revenue to solve some of
the problems caused by fast foods.
However, the firm may choose to pass on the cost of production into the consumers.
This would mean that supply wouldn't decrease only the prices would increase. And
this may not have a big impact of the demand for fast foods and fast foods only take
up a small portion of a persons income therefore their demand for fast foods is likely
to be price inelastic.
In conclusion, regulations will be seen as effective as they provide an incentive for
people to actually consume less as they are more aware of their harms. A regulation
on putting calorie content on packaging and an increase in VAT imposed on fast
foods together may help to reduce the market failure more effectively than if it was
only regulations.