1.3.2 Externalities Flashcards

1
Q

Externalities

A

economic “spill-over” effects which are not included in the price and impact those not related to the economic transaction (regarded as a market failure)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Market failure

A

a situation in which the free market fails to allocate resources efficiently

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

External costs (negative externalities)

A

occur when the social costs of an economic action are greater than the private cost (social cost= private cost + external cost) (e.g pollution from factory)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

External benefits (positive externalities)

A

occur when the social benefits of an economic action are greater than the private benefits (social benefits = private benefits + external benefits) (education)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Explain how education might be an external benefit

A
  • The education received by a child means they can get a job that have reasonable income (private)
  • The child’s education may benefit wider society if she becomes a doctor and treat people so they can go to work (external benefit)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Private cost and benefit for gum on consumer

A
  • Cost: the price of gum

- Benefits: Enjoyment from eating the gum

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

External cost and benefit for gum on consumer (society)

A
  • Cost: The costs to councils of both scraping off spat-out gum from pavements and collecting discarded packets
  • Benefits: oral hygiene
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Private cost and benefit for gum on producer

A
  • Cost: Manufacturing, marketing costs

- Benefits Sales revenue and profit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

External cost and benefit for gum on producer

A
  • Cost: Pollution from the factory, congestion from the lorries
  • Benefits: None
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Negative externality diagram

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Positive externality diagram

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Impact on economics agents of externalities and govt intervention examples

A
  • gum neg externality: gum on the street which gets stuck on people’s shoes and the govt have to clean (gum have a higher social cost than private cost)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Policy options for negative externalities

A
  • “Nudge”
  • Prohibition
  • Indirect/specific tax
  • Quota system
  • Regulation
  • Information provision
  • Subsidise more favourable substitutes
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Nudge policy for negative externalities

A

change people’s behaviours e.g by providing easier alternate options (e.g bins for gum)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Prohibition for negative externalities

A

putting a ban on certain things (with penalties)

- gum ban in SIngapore or DDT pesticides being banned

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Indirect/specific tax for negative externalities

A
  • use tax to offset the externality

- to internalise the externality of the tax passed (so the social cost becomes a private cost (hypothecation)

17
Q

Quota system for negative externalities

A

the negative externality is capped at a certain amount (e.g carbon trading units) e.g Kyoto Protocol

18
Q

What is the carbon trading scheme?

A
  • a body set a cap on carbon emissions by giving out a certain amount of carbon units
  • If a company has more carbon units than needed, than can sell them to other countries/companies
  • this makes polluters pay and rewards low carbon emissions
19
Q

Regulation for negative externalities

A

allow occurrence at certain times

20
Q

Information provision for negative externalities

A

the impacts of cigarettes on packs

21
Q

Subsidies more favourable for negative externalities

A

e.g green energy paid for

22
Q

Evaluation of policy for negative externalities

A
  • quantification of the externality & knowing the point at which MSC=MSC is difficult
  • putting a monetary value on the deadweight loss is difficult to achieve
23
Q

Disadvantages of Prohibition for negative externalities

A

may create illegal markets e.g black markets

24
Q

Disadvantages of Indirect/specific tax for negative externalities

A

the tax effects may be regressive and the impacts may fall more heavily for poorer people

25
DIsadvantages of regulation
- the costs of implementation | - monitoring & managing some of the options may be prohibitive
26
Disadvantages of Quota system for negative externalities
global agreements are very difficult to achieve
27
Disadvantages of Subsidies more favourable for negative externalities
subsidies have financial & opportunity costs which may create a dependency on the subsidy
28
Positive externalities in consumption definition
a situation in which the free market leads to an under-consumption of a g/s relative to the social optimal (e.g education and vaccines)
29
Diagram to show a positive consumption externality:
30
Diagram to show a positive consumption externality with subsidy:
31
How to achieve the social optimal/ social efficiency/welfare maximising (increase consumption of positive externalities)?
- Subsidise to push the price down to achieve the socially optimal quantity - Compulsion / mandatory (eg education / Tetanus MMR vaccines) - State provision free of charge
32
Positive consumption externality diagram explanation
- where MPC (s) = MPB (d) - the social efficient equilibrium is higher the market equilibrium since the MSB (social benefit) is greater than the MPB (private benefit) - the welfare gain is the external benefit that the market has used due to underconsumption
33
Result of positive externalities
- creates a 3rd party spillover benefit - the social benefit of production/consumption is greater than the private benefit - external benefit might be in the form of lower cost for other parties or increased revenue/profits for other parties
34
Why is education a merit good?
- Private benefit: job and income - Social benefit: better skills= increased productivity, more social opportunities, increased living standards, higher income= more consumption and money spent on economy/expenditure, increase in tax revenue to govt = government expenditure
35
Advantages of imposing an extra charge for vehicles
* allows polluters to pay for negative externalities * taxes as a hard nudge to drive investment )buy less polluting cars)
36
Disadvantages of imposing an extra charge for vehicles
* regressive effect on poorer households (= increase demand of public transport) * small businesses face extra costs = reduce profits = contraction in employment * other alternatives = have car free days