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Economics SL > 2.2 Externalities > Flashcards

2.2 Externalities Flashcards

1
Q

positive consumption externality

A

MSB = MPB + MEB
=> MSB > MPB

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2
Q

negative consumption externality

A

MSB = MPB + MEC
=> MSB < MPB

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3
Q

positive production externality

A

MSC = MPC + MEB
=> MSC < MPC

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4
Q

negative production externality

A

MSC = MPC + MEC
=> MSC > MPC

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5
Q

what is a negative production externality

A

when the production of a good/service has a negative impact on a third party not involved in producing or consuming the good

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6
Q

is externality market failure?

A

an externality is not market failure in itself; but it can cause market failure when ignored by market decision makers

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7
Q

examples of negative production externalities

A
  • pollution from factory causing health problems for local residents
  • traffic congestion caused by the rebuilding of a road
  • resource depletion/ degradation
  • deforestation
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8
Q

what is a positive production externality

A

when the production of a good/service has a positive impact on a third party not involved in the producing or consuming of the good

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9
Q

examples of positive production externalities

A
  • increase employment and economic growth
  • biodynamic farming promotes biodiversity and a habitat for pollinators
  • the production of manneure from livestock fertilizes soil
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10
Q

what is a negative consumption externality

A

when the consumption of a good/service has a negative impact on a third party not involved the producing or consuming of the good

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11
Q

examples of negative consumption externalities

A
  • smokers
  • fireworks
  • alcohol
  • fossil fuel-consuming vehicles
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12
Q

what is a positive consumption externality

A

when the consumption of a good/service has a positive impact on a third party not involved in the production or consumption of the good

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13
Q

examples of positive consumption externalities

A
  • vaccines (preventative healthcare)
  • sustainable forms of transport
  • deodorant
  • renewable energy
  • education
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14
Q

source of market failure

A

decisions are based on private costs/benefits but welafre is maxmised when the full social costs/benefits are considered

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15
Q

Explaining externalities with a diagram

A

(1) say whether social cost/benefit is greater than private
(2) explain the private side
(3) explain the social side
(4) say why its the socially ptimum point (MSB = MSC)
(5) say what form of market failure is happenign

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16
Q

policies to correct market failure caused by negative externalities

A
  • indirect taxes
  • carbon taxes
  • tradeable pollution permits/caps
  • government regulations
  • information campaigns
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17
Q

indirect taxes to correct negative production externalities

A

1) gov’t sets tax = per unit externality, S curve shifts inwards to S(MPC+tax) creating a new equilibrium at q.so. (qtax)
2) the market operates @ the s.o. level of output => welfare loss is eliminated
3) price increases from Pm to Ptax - higher price now refelect the full cost of the good
4) gov’t gains tax revenue

18
Q

indirect taxes to correct negative consumption externalities

A

1) tax is used to shift the supply curve inwards so that it intersect with D(MPB) at Qs.o.
2) the market operates at the s.o. levle of output => welfare loss is eliminated
3) price increases so that the higher price now reflects the full cost of the good
4) gov’t gains tax revenue

19
Q

evaluation of using indirect taxes to correct negative externalities

A
  • the effectiveness depends on how easily measureable the externality is
  • the effectiveness of the tax depends on the magnitude of the tax in relation to the externality
  • the incidence of the tax depends on elasticity
  • they are regrefessive
  • poorly targeted
20
Q

why are indirect taxes poorly targeted

A

because the taxes are not focused on the consumers or producers that are engaged in the harmful behaviour, so they don’t offer an incentive to change the behaviour

21
Q

incidence of the tax

A

PED elastic => firms pay
PED inelastic => consumers pay

22
Q

negative externality that carbon taxes aim to correct

A

global warming:
- increased risk of natural disaster
- risks to good security/famine
- costs of mirgation as people escape inhospitable environments

23
Q

how do carbon taxes work

A

(1) they raise business costs for firms, causing them to internalize the externality and shift supply to the left
(2) they create an incentive for firms to swtich to green energy

24
Q

pros of carbon taxes

A
  • enoucrage firms to switch to green energy
  • increases the s.o. optimum quantity of output
  • easier to implement/design
  • can be applied to all fossil fuel using industries
  • does not require as much monitoring or enforcement
  • makes energy prices more predictable
25
Q

cons of carbon taxes

A
  • taxes face political pressures t be set too low
  • cannot target a particular level of carbon reducation
  • are regressive
26
Q

market for permits

A
  • the supply of permits is perfectly inelastic because there is a fixed supply of permits
  • the price of the permits is determined by demand
27
Q

how do tradeable permits address the externality problem?

A

(1) immediately reduces the amount of carbon (externality) produced and raises costs for firms
(2) incentive impact

28
Q

types of gov’t regulations to prevent negative externalities

A
  • ban on gum chewing in singapore
  • bans on smoking in public places
  • policies requiring consumers to pay for waste dispsoable bags
  • regulations on chemical affluents
  • regulations on diesel cars
  • quantity restrictions on certain purchases
  • age restrictions
  • gun laws
29
Q

evaluation of regulation

A
  • fixing the appropriate level of regulation
  • the costs to firms of emeting the regulations
  • impact on international competitiveness
30
Q

examples of tradeable permit schemes

A

european union emissions trading sysetms (2005)
- never been high enough to be effective

31
Q

another word for trabale permits

A

emissions trading system (ETS)

32
Q

limitations of tradable permits

A
  • political favorutism
  • research and technical info required to set up
  • if cap set too low, firms struggle to produce
  • makes prices unpredictable
  • often only targets on industry/small group
33
Q

policies to correct market failure due to positive externalities or merit goods

A
  • subsidies
  • direct provision
  • legislation/regualtion
  • information campaigns
    -nudges
34
Q

limitations of subsidies

A
  • effect depends on PED
  • difficult to estimate externality
  • danger firms may become to reliant on subsidies
  • opportunity cost to gov’t budget
35
Q

limitations of government regulation

A
  • can often over-correct (e.g. bans)
  • don’t tackle the root problem
36
Q

pros of gov’t regulation

A
  • can target certain areas
  • do not rely on changes in consumer behaviour
37
Q

subsidies to correct market failure due to positive consumption externalities

A
  • aim to set the per unit subsidy equal to the per unit externality so that supply shifts out and intersects demand at qso.o
  • subsidy lowers price from Pm to psubs and increases quantity sold (correcting the welfare loss)
  • both producer and consuer surplus increases
  • cost to the gov’t of per unti subsidy x quantity sold
38
Q

direct provision to correct amrket faillure due to positive consumption externalities

A
  • gov’t supplements market supply with its own provision
  • price down and quantity sold increases
39
Q

examples of direct provision to correct market failure due to positive consumption externalities

A
  • public education
  • contraception
  • vaccinations
40
Q

example of government regulation to correct market failure due to cosumption externalities

A
  • schools require SexEd for students
  • education currciulums
  • masks compulsory
  • eduation laws
  • car insurance required
  • vaccine passports in korean
    -washing your hands campaigns

Economics SL (10 decks)

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