To compare policies neutrally, describe what each option does in the model, who gains and who loses, and what the model leaves out. Then tie any conclusion to a stated aim, never to a personal view about what governments ought to do.
This lesson ties together market failure concepts. It reuses the external cost idea from separating private from external costs.
What does a neutral comparison contain?
Use a short frame for each option.
- Effect on the key variable (quantity, price, who pays).
- Who gains and who loses, with numbers if given.
- Assumption it relies on (for example, that the external cost is known).
- What the model leaves out.
- A conditional judgement: “If the aim is X, then option A fits better because…”
Avoid words that carry a verdict, such as “unfair”, “obviously” or “should”. Use “reduces”, “raises”, “shifts the cost to”.
Worked example: Harbour Dye Works market
Market for dyed cloth in the fictional town of Pelabuhan Teduh. Quantity Q is rolls per week. Money is RM per roll.
- Demand (MPB): P = 90 − Q
- Private marginal cost (MC): P = 30 + Q
- External cost: RM 10 per roll, so social marginal cost MSC = 40 + Q
Step 1, market outcome. 90 − Q = 30 + Q, so Q = 30, price RM 60.
Step 2, social optimum. 90 − Q = 40 + Q, so Q = 25, price RM 65.
Step 3, option A: a tax of RM 10 per roll. The firm’s cost becomes 40 + Q, so the market lands on Q = 25. Buyers pay RM 65. The firm keeps 65 − 10 = RM 55, which equals its private MC at 25 (30 + 25 = 55). Tax revenue = 10 × 25 = RM 250.
Step 4, option B: a limit of 25 rolls. Output is 25, and buyers pay RM 65 as demand dictates. The firm keeps the whole RM 65 and its cost at 25 is RM 55, so it earns an extra RM 10 per roll, RM 250 in total.
Step 5, compare in a table.
| No action | Tax A | Limit B | |
|---|---|---|---|
| Quantity | 30 | 25 | 25 |
| Price paid by buyers (RM) | 60 | 65 | 65 |
| Consumer surplus (RM) | 450 | 312.5 | 312.5 |
| Producer surplus (RM) | 450 | 312.5 | 562.5 |
| Tax revenue (RM) | 0 | 250 | 0 |
| External cost (RM) | 300 | 250 | 250 |
| Net social welfare (RM) | 600 | 625 | 625 |
Net social welfare = consumer surplus + producer surplus + tax revenue − external cost. The check: 312.5 + 312.5 + 250 − 250 = 625, and 312.5 + 562.5 + 0 − 250 = 625.
Step 6, neutral write-up. Both options bring output to 25 and raise welfare by RM 25 compared with no action. They differ in who receives the RM 250. Under A it is collected as revenue. Under B it stays with the firm. The model assumes the external cost is known and constant at RM 10. Real situations may be less certain, and the model does not include administration costs.
Notice there is no sentence saying which option is right. A conditional line might read: “If the aim is only to reach 25 rolls, both achieve it in this model. If the aim also includes who receives the RM 250, the options differ.”
The mistake to watch for
Mistaken answer: “The tax is better because the government should collect money and firms should not profit from pollution.”
The student has moved from the model to a personal value judgement.
Correction: state the criterion first. “Judged by who receives the RM 250, option A directs it to the tax collector and option B to the firm. The model does not say which allocation is preferable.” The correction removes “should” and keeps the facts.
Check yourself
1. In the example, what is the welfare gain from either option compared with no action?
Show answer
625 − 600 = RM 25. It also equals the triangle ½ × 5 × 10 = 25 between MSC and MPB from Q = 25 to 30.
2. Rewrite in neutral wording: “Limits are unfair to small firms.”
Show answer
For example: “In this model a limit sets the same output for every firm, so a firm with higher costs may find the limit binds sooner. The model does not include differences between firms.” The rewrite names the mechanism and the model’s limit.
3. Name one thing the model leaves out.
Show answer
Any one: the cost of measuring the external cost, administration costs, changes in the firm’s technology over time, or effects on other markets.
Where this leads next
Try the whole cluster in the market failure practice set. The ratios with interpretation limits tool supports comparing figures across options.
Neutral evaluation is a skill that improves with feedback on your own writing. Online one-to-one Economics tuition gives a teacher the chance to give that feedback sentence by sentence.