5.4 Negative externalities of consumption Flashcards
What is a negative externality of consumption?
consumption of a good or service generates a negative effect on a third party or society, which has not been factored into the calculation when deciding to consume that good.
Example: Second-hand smoke affecting non-smokers.
Why is the consumption of cigarettes considered a market failure?
MSB < MPB => overconsumption relative to the socially optimum output.
What is meant by over-allocation of resources in the context of negative externalities of consumption?
The amount of the good consumed is greater than what it should be, from society’s point of view.
Provide two examples of negative externalities of consumption.
- Driving/traffic
- Drinking
- smoking
- fishing
What does the gap between MPB and MSB indicate in terms of market failure?
external cost on society = leading to an overallocation of resources.
neg. exte. consumption
What is the optimal amount
consumed from society’s point of view?
The point where the MSC curve crosses the MSB curve, at ‘Q*’.
What are three possible solutions to negative externalities of consumption?
- Ban or regulate the good
- Impose an indirect (Pigouvian) tax on the good
- Negative advertisement
nudges (indirectly/making more inconvenient to access)
What is a Pigouvian tax?
An indirect tax imposed by the government to increase the price of a product and decrease consumption.
What is one potential problem with banning or regulating a good?
Creates illegal parallel market.
Fill in the blank: The consumption of cigarettes creates a welfare loss because the marginal private benefit exceeds the _______.
marginal social benefit.
What is the impact of an indirect tax on the MPC curve?
It causes an upward shift of the MPC curve to MSC + tax.
What is the purpose of nudges in the context of negative externalities?
Design methods to influence consumer behavior to decrease demand.
What is the opportunity cost associated with government education campaigns?
Costs to government for implementing the education programs.
Why might the effectiveness of educational campaigns vary?
It doesn’t have the same effect on different cultures and income groups.
Negative externality of consumption diagram
Solution to NEC - tax
Solution to NEC- regulation
