Read the information below about disposable electronic vapes. A coastal town has found discarded vapes in drains, parks and on beaches after its summer musi...
Question 1 Report
Read the information below about disposable electronic vapes. A coastal town has found discarded vapes in drains, parks and on beaches after its summer music festival. Users pay a low market price, but the council pays for litter collection and local wildlife groups report batteries and plastic entering the sea. Fig. 1 illustrates the council's estimate of this market. The national government is examining whether a tax, a ban, or stricter rules for retailers would reduce the external costs. Some firms argue that a tax could increase their costs and reduce sales, while health groups state that the existing market price sends the wrong signal to consumers.
(a) Define an external cost. [3]
(b) Explain why MSB is below MPB in Fig. 1. [5]
(c) Which government policy is most likely to reduce the quantity from Q1 towards Q2: a per-unit tax, a subsidy to vape firms, or a cut in retailer business rates? Explain your choice. [6]
(d) Describe two possible disadvantages of a ban on disposable vapes. [6]
Answer Details
(a) An external cost is a cost imposed on a third party by consumption or production which is not paid by the buyer or seller in the market. [3]
(b) MPB measures the benefit received by the vape consumer. However, discarded vapes create litter and clean-up costs for the council, while batteries and plastic can pollute water and harm wildlife. These external costs reduce the benefit to society. Therefore marginal social benefit is below marginal private benefit. [5]
(c) A per-unit tax is most likely to reduce quantity from Q1 towards Q2. It raises the price paid by consumers or their private cost, reducing quantity purchased. The tax makes consumers take more account of the external cost, moving output towards the socially efficient level. A subsidy to vape firms or a cut in retailer business rates would lower costs and may increase quantity instead. [6]
(d) A ban may encourage consumers to buy illegal or unregulated products, which may be unsafe and avoid tax. It may also reduce sales and employment for firms and retailers, lowering income in the sector. Consumers might switch to another harmful product, limiting environmental or health gains. Any two developed disadvantages gain credit. [6]
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