5.3 Negative Externalities of Production Flashcards
Market failure
Occurs when the market fails to allocate resources efficiently or to provide the quantity and combination of goods and services mostly wanted by society
Allocative efficiency
An allocation of resources that results in producing the combination and quantity of goods and services mostly preferred by consumers
Externality
Occurs when the actions of consumers or producers give rise to positive or negative side-effects on other people who are not part of these actions
Marginal private costs
The additional costs to producers of producing one more unit of a good
AKA marginal cost of production
Marginal social benefits
The additional benefit received my society when they consume one more unit of a good
The marginal benefit of a public good diminishes with the quantity of the good provided
Marginal social costs
The additional costs to society of producing one more unit of a good
It includes both marginal private cost and marginal external cost.
Marginal private benefits
The additional benefit received my consumers when they consume one more unit of a good
Negative production externalities
A cost of production on a third parfty in the form of pollution or resource depletion relfected in social costs leading to MSC>MPC
Pigouvian tax
Indirect taxes designed to correct negative externalities of production or consumption
attempts to shift MPC to MSC & internalizes costs
(VERY DIFFICULT, since quantifying MSC is very difficult)
Tradable permits
Permits that can be issued by government authority/international body that can be traded in a market = to limit total amount of pollutions = CREATE SCARCITY (key concept)
shifts MSC to MSC2 (closer to MPC)
Collective self-governance
A solution to the use of common pool resources where the users take control of the resources and use them in a sustainable way
Key Words for negative externilities of production
- overallocation of resources
- Qm>Qopt
- MSC>MPC
Solutions for negative externalities of P
- tradable permits
- pigouvian tax
- (carbon tax)
- self-governence
- Legsilation & Regulation
Legislation & Regulation
Government uses authority to act in public interest
Disadvantages:
* Supervision costs
* Do not offer incentives to reduce negative externality
* Cannot distinguish between firms with lower/higher pollution costs
Negative Externalities (Carbon Tax) - RWE
Iceland fishing industry
=> fishing decrases sustainability & destroys environment
=> carbon footprint through shipping & processing
* increase of carbon tax by 364% since 2010
* now at ISK 13.45/€ 0.91 per litre of oil
Advantages
* gave incentive for environemnatlly friendly technology & energy conservation
Disadvantages
* companies & firms suffer => exports 98% without subsidies
* pay 1/3 of carbon tax income
Tradable permits argument
Advantages
* somehwat internalizes costs (by making company pay to pollute)
* set a maximum on pollution levels = indefinetly decreases them
* creates incentive for firms to shift to green technology
* creates financial incnetive for firms
* long term cap reduction = dcerease levels consistently
Disadvantages
* difficult to distribute (bias)
* market manipulation of firms (ex:to monopolize TP’s)
Carbon tax
A type of pigouvian tax per unit of carbon emission of fossil fuels (policy against climate change)
Aims to shift MSC1 to MSC2 (closer to MPC)
Carbon tax arguments
Advantages
* Government revenue = reinvested in subsidizing green technology companies
* creates incnetive to stop/reduce polluting
Disadvantages
* requires continuous rate adjustements
* difficult to calculate general pollution level
* decrease in pollution depends on companies willingness to shift
* doesn’t directly incentives green technology
* regressive on smaller polluting companies
* increases production costs = increase smarket cost for conumers = take burden = affects low income households more
Negative externality (Tradebale permit) - RWE
Euroean Union trading Emissions Sytem (ETS)
* emissions down be 46.7% since 2005
* cap decreased by 1.74% per year to 2.21%
* now 4.3% starting 2024
* plan to reduce by 90 million permits
Negative externlaity question vocab
- overallocation of resources
- opportunity cost
- common pool resource
- MSC>MPC
- internalization of costs
A** answer
* refrence to sustainability & resource scaricity
* businesses make CHOICE to switch to green technology
* any tax can be regressive
* tax = shifts MPC
* TP & carbon = shifts MSC
Negative externality of production - diagram
