Central planners cannot gather all the dispersed information about consumer preferences and resource availability. This results in misallocation of resources—producing the wrong goods or using inefficient methods—leading to shortages or surpluses.
Staff can specialize in specific tasks (e.g., one person handles cashiering, another handles clothing racks). This allows them to become more skilled and faster, increasing total output. Reduced Time Waste: hkcee 2010 econ paper 2 q2
When handling a past paper scenario modeled after this question, use the following tactical approach: 1. Identify the Options List out all the paths the individual or firm can take. 2. Segregate Explicit and Implicit Value Central planners cannot gather all the dispersed information
State the initial value of that next best alternative plus any explicit costs incurred from the chosen option. Step 4: Analyze the Shift/Change This allows them to become more skilled and
To correct the market failure, the government could impose a Pigovian tax equal to the marginal external cost per unit. This raises the firm’s marginal private cost to MSC, internalizing the externality and restoring the social optimum. The tax is economically efficient and raises public revenue but requires accurate estimation of the external cost and effective enforcement; misestimation leads to inefficiency. Alternatively, the government can set emission standards or limits (regulation). Standards guarantee pollution reduction but can be less cost-effective because firms face different marginal abatement costs. Tradable permits (cap-and-trade) combine certainty about total emissions with cost-effectiveness: firms with low abatement costs sell permits to high-cost firms. Downsides include administrative complexity, initial permit allocation issues, and the need for robust monitoring.
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