Notesale: Turn your study into money

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June 2012 the extent to which regulations alone can be used to correct the
market failure associated with the sale of fast food – 18 marks
Regulations are laws that the government passes to correct behaviour to correct market
failure
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Fast food is a
demerit good with negative externalities
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Fast food is a demerit good because it has a high
level of fat and sugar and this damages ones health by causing high blood pressure, heart
disease and obesity
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One way that the government can address this situation is to introduce a regulation
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Fast food is consumed at D and supplied at S
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The supply curve shift left as the producers
stand to make less profit and are therefore less willing to supply and the new higher price
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However P1/Q1 is allocativly efficient,
maximising social economic welfare and solving the over consumption (Q1-P1)
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To do this they can create a law that
says there must be a minimum price (P1) for fast food – for example £15 for a small pizza at
Rocco rather than £10 as it stands
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This would decrease the external costs and the
effects of the demerit good as less people would be willing and able to buy it; thus solving
the market failure by using a regulation
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Price controls work against the price
mechanism; they take the market out of equilibrium causing a surplus of S-D
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In a
normal/free market is there is a surplus in the market the producers lower this price to
stimulate demand and shift the extra stock, for example Rocco’s may have a buy one get
one free offer on small pizzas to shift excess
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Therefore this minimum price control may lead to the creation of a
black-market where fast food is sold cheaper than is legal, for example online pizza ordering
services may charge less
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Enforcement of this law has an opportunity cost, this

is the cost of the next best alternative forgone, for example money spent on murder
investigations (a movement along the PPC from B to A, to opportunity cost is the 30 officers
who could have been investigating murders)
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In conclusion, a government regulation cannot alone solve the market failure of fast food
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Also
the government may not get the price control correct and even if they do then there will be
a surplus of fast food and this is a misallocation of our scare resource and may lead in some
case to the creation of a black market
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for example if the fine was £1000 yet the producer stood
to make £2000 selling at the lower price and higher demand equilibrium then they may
ignore the regulation
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