A government introduces a steep tax on single-use plastic packaging to correct the market failure associated with plastic waste. However, this intervention leads to government failure. Which of the following is the most likely cause of this government failure?
The tax revenue generated is entirely ring-fenced to subsidise municipal recycling facilities, reducing the government's fiscal deficit.
The tax rate is set equal to the marginal external cost (MECMECMEC) at the socially optimum level of output, successfully internalising the externality.
Businesses respond by substituting plastic with heavyweight paper alternatives, which require significantly higher water and energy consumption, leading to a net increase in environmental damage.
The price elasticity of demand (PEDPEDPED) for plastic packaging is highly inelastic, causing consumer surplus to fall while producer surplus remains unchanged.
378 exam-style questions on AQA A Level Economics 1.8 The market mechanism, market failure and government intervention in markets, covering 1.8.1 How markets and prices allocate resources, 1.8.2 The meaning of market failure, 1.8.3 Public goods, private goods and quasi-public goods, 1.8.4 Positive and negative externalities in consumption and production, 1.8.5 Merit and demerit goods, 1.8.6 Market imperfections, 1.8.7 Competition policy (A-level only), 1.8.8 Public ownership, privatisation, regulation and deregulation of markets (A-level only), 1.8.9 Government intervention in markets, and 1.8.10 Government failure. Each one has a worked solution and a mark scheme showing where the marks go.