1.3.2 Externalities Flashcards
what are negative externalities (external costs)?
two types of negative externalities
costs which affec third parties outsid the price transaction
* negative consumption externalities
* negative production externalities
negative effect on others
what is
* social cost
* social benefits
- social cost= external cost + private cost
- social benefits= external benefits + private benefits
what is the price transaction ?
the transaction between the consumer and producer
what are two diagrams that edexcel require you to know?
- negative production diagram
- positive consumption diagram
how do you draw externaility diagrams?
negative/ positive, consumption/production, welfare triangle
if
* negative = social to the left
* positive= soical to the right
* production= affects costs
* consumption = affects benefits
* welfare traingle= always pointing towards social equilibrium
what are negative consumption externalities?
when consuming a good leads to costs to third parties outide the price transaction
eg: alchohol, cars
what are negative production externalities?
when producing goods leads to costs to third parties outside the price transaction
eg: building buildings, factories
what are private costs?
a cost to a producer or consumer within the price transaction
what is market failure?
when the price mechanism leads to an inefficent allocation of resources
price/quantity produced not beneficial to society
what are the 4 types of market failure?
- negative externalities
- positive externalities
- public goods (under provision)
- information gaps
what is the socially efficent equilibrium?
marginal social costs = marginal social benefits
* society welfare is maximised
what do the demand and supply lines becomes in production externality diagrams?
- demand line= marginal private benefits (utility)- MPB
- supply line= marginal private cost -MPC
Draw a negative production externality/ external costs of production diagram
as quanity increases the external costs increase
what is the welfare loss?
distance between socially efficent equailibrium and the market intersection (MPC & MPB)
* Traingle shape
* Difference in quantity = overproduction
what are negative consumption externailities?
when the consumption off goods such as cigareetes leads to external costs (secondary inhaling)
what are welfare losses the causes of?
- overproduction
- overconsumption
how do goverments counteract welfare losses?
indirect tax on goods and services
* tax size= external costs
* ‘negative production externality has been internalised’
* production moved to socially efficent equilibrium
draw a negative production externality with tax diagram
tax internalises the negative production externality
how does the cap and trade system work?
- goverment set up a pollution cap
- gives out permits to firms depending on size
- last 10 % are autioned- raising tax revenue
- these permits are the tradable
what are minimum prices?
the lowest price suppliers of a good can legally sell for
* price set above the equailibrium price
* creates excess supply
* market stuck in disequilibrium
reduction of over consumption
what is regulation?
when the goverment makes changes to the law to adress market failure
what are some eamples of regulation?
- banning goods completley (guns, class A drugs) becuase extrenal costs too severe
- set enviromental standards
*
what are tradable pollution permits?
permits which allow firms to pollute up to a certain limit. These permits are then tradable between firms
eg: europe emissions trading scheme
what are positive externalities?
benefits that affect others outside the price transaction
What are positive consumption externalities?
when the consumption of a good leads to external benfits
vaccines, educational courses
what are postive production externalities?
when the production of a good leads to external benefits
beekeepers, solar pannels,
draw the positive consumption externality diagram
how do subsidies solve positive externalities?
- help underconsumption
- help underproduction
define externalilties
The cost or benefit a third party receives from an economic
transaction outside of the market mechanism
define potential social welfare gain
the excess of social benefit over social cost for a given quanitity
define social welfare loss
the excess of social cost over social benefit for a given output
what are the external benefits from bus journeys?
reduced road congestion
reduced air pollution
better than taking one car per person
what are the positive consumption externalities of vaccines?
- reduction in the spread of disease–> healthier population–> more productive workforce
- less absenteeism from work due to ill health –> more profits for firms
what are the negative production externailities of extracting quarrrying stone?
- noise pollution from lorries
- fall in nearby property prices
- air pollution from dust
- damage to wildlife
what are postive consumption benefits of higher education?
- more skilled workforce–> more productive workforce –> more profit for firms
what are the analysis points for air pollution?
producer/ consumer/ government framework
- air pollutuon–> lung disease/ redution is air quality
- external costs on consumers outside the price transaction
- worsening health and reducing consumer living standards
- greater strain on the NHS, worsening the government’s budget deficit or diverting funds from other areas such as education
- reducing external benefits
what are the analysis points for renewable energy?
- help to reduce air pollution
- help government reach air pollution targets
- improving air quality for consumers, improving health and living standards
what are the analysis points for damage to goods/ services
what are the analysis points for new jobs?
- new jobs for specific occupation
- specific occupation will spend their incomes in the local economy
- local firms will make more sales, increasing revenues and profits
- government will recieve higher income tax revenue from the specific occupation, higher VAT revenue from the increased spendning and higher corporation tax revenue from firm’s higher profits
specific occupation= aerospace engineers
what are the analysis points for noise pollution?
- noise makes sleep difficult
- disrupting day- to day life and increasing stress, reducing living standards
- also negative impacts on produers as areas with high noise pollution will be less visited by consumers
- firms demand will fall, decreasing their revenue and profit
EVALUATION PARA FOR NOISE POLLUTION QUANITIFYING
- However, it is difficult to quantify external costs like noise pollution
- there is missing information as to how many people are affected by the noise pollution
- and adding up the effect on everyone can prove to be difficult
- Moreover, to determine the cost of noise pollution requires a value judgment because costs are normative
- so we cannot accuratley quantify the external costs
explaining the negative / positive externaility diagram
- external benefits/ costs such as …..
- mean that MSB/MSC is above MPB/MPC…
- consumers would under consumer/ producers would over produce
- creating a social welfare gain/loss
- so society benefits from increased…./ negativley affecting society
what are the analysis points for new technology/ advancements?
- new technology–> increased efficency
- firms reduce costs and increase profits
- increasing government corportation revenue,
- which it could invet further into education… leading to more research and development
what are the analysis chains for alcoholism?
- worsening health of students
- decreased future productivity
- reducing firms profits
- poorer health –> strain on the NHS, worsening government budget deficit
time evaluation for higher education (external benefits)
However, degrees take years to complete, so in the short run firms will not enjoy any external benefits. In fact because students are studying instead of working, firms will lose out in the short run because fewer workers are availiable. In the long run benefits may not be seen if students do not complete tehir degrees
