8.4 Positive And Negative Externalities In Production And Consumption Flashcards
when do externalities exist?
when there is a divergence between private and social costs and benefits
what is an externality?def
a public good(in the case of external benefit) or public bad(in the case of external cost) that is dumped on third parties outside the market
externality simple def
it is an indirect cost or benefit to an uninvolved third party
externality simple def
it is an indirect cost or benefit to an uninvolved third party
how is externalities an example of market failure?
there is no market where it can be brought or sold-they are produced and received outside the market-therefore it is a missing market
what is a positive externality?def
an external benefit that occurs when consumption or production of a good causes benefit to a third party
(where social benefit> private benefit)
what is a negative externality? def
an external cost that occurs when the consumption or production of a good causes costs to a third party
social costs> private costs
can the provider of externalities charge a market ruling price to any free riders willing to enjoy it?
no
-can’t charge for a beautiful view(positive externality)
-can’t charge for noise(negative externality)
what is property right?
exclusive authority to determine how a resource is used(owned by gov or individuals
what happens to property rights when an externality is created?
it disapears(because the owners of a beautfuil house cannot stop people enjoying the positive view of the house from the street without paying)
what is the free-rider problem?
a free-rider is someome who benefits without paying as a result of non-exculdablity
-customers may choose not to pay for a good and free ride with the result that the incentive to provide the good through the market disappears
can the provider of an external benfit (positive externalities)stop free-riders enjoying it?
no, they cannot charge a market price to the free-riders who are enjoying it
can the unwilling free riders who consume external costs(negative externalities) charge a price to the polluter?
no
the free-rider problem causes what?
market failure
why does the free-rider problem lead to market failure?
the incentive to provide the good to the market diappears as too many people enjoy it for free and it creates a missing market
who creates production externalities?
firms
who creates consumption externalities?
households
what is a production externality?
an externality(positive or negative) generated in the course of producing a good or service
why would electricity from a power station be underpriced?
reflects only the money costs of production and not the negative externalities of noise amd eye sores(real costs)
what has happened when the electrcity of a power station is under priced?
allocative function has broken down-leads to over-consumption
what is a consumption externality?
an externality(positive or negative) generated in the course of consuming a good or service
can consumption externalities be negative?
yes, people noisily esting popcorn for e.g
can consumption externalities be positive?
yes,pleasure gained by walking past beautiful buildings
(important to note what might ne a positivr externality to one person may be a negative externality to someone els)
if negative externalities occur in production what happens to the good?
end up being under priced(part of the real costs are dumped onto others instead of being borne by the producer)
when a good is under-priced(due to negative externalities in production) what has the market done?(what coes this result in)?
failed to create the right incentives(too much of the good ends up being produced and consumed)
what happens to prices when there is positive production externalties?
prices end up being too high
-the market has created the wrong incentives which discourages consumptiom
-prices over reflect consumption-not enough of the good ends up beinf produced and consumed
What did Professor Ronald Coase argue about private property rights?
If markets were created for private property rights government intervention to correct market failures would not be necessary.
(Governments should try armed work with the market rather than against the market through regulation)
What is the worst case scenario for private property rights and why?
When they are replaced with ‘common ownership’ but without any form of government control
What are governments doing to fix environmental market failure?
-regulation(bans)
-taxation on pollution
-behaviour nudges
(Link to tragedy of the commons for why there are environmental market failures)
What is the tragedy of the commons?
a situation in which individuals with access to a public resource (also called a common) act in their own interest and, in doing so, ultimately deplete the resource
In economic theory what do economic agents consider in a market situation?
Only their private costs and private benefits (ignoring costs posed on others)
For an economic agent when does benefit maximisation occur?
When marginal private benefit=marginal private cost
(MPB=MPC)
What is social benefit maximisation?
What maximises the public interest or welfare of the whole community
When does social benefit maximisation occur?
When marginal social benefit=marginal social cost
(MSB=MSC)
What is social benefit?
Private benefit +external benefit (e.g a positive externality)
MSB
MPB+MEB
Social cost def
Marginal private cost+marginal external cost
MSC
MPC+MEC
On a graph when would MPB and MSB be the same line
When there is negative externalities so there is no external benefit
Externality diagram for burning coal?
Analyse the externality diagram for burning coal(exam practise here)
-private benefit maximised at output Q1
-socially optimal level of output is Q2
-market forces over produce coal as the privately optimum level is greater than the socially optimum level
-this is market failure because too much of the good I’d being productive
-electricity is too cheap at p1 so should rise to p2 to get socially optimal output
-deadweight loss in diagram as society would be better to not produce the extra electricity (when production takes place at the socially optimal output the deadweight loss is eliminated
What do negative externalities lead to?
Marginal social costs of production exceeding the marginal private costs of production
What do negative externalities lead to?
Marginal social costs of production exceeding the marginal private costs of production
What does a positive externality diagram look like?
When positive production externalise are generated, the marginal social costs of production lie below the marginal the marginal private costs incurred by the producers of the good and service
What is a negative marginal external cost the same as?
A positive marginal external benefit
Where is production at the socially optimal output?
Point Y
What would producing at Q2 do?
Eliminate welfare loss
When can a perfectly competitive economy achieve allocative efficiency?
When price=marginal cost
What are three necessary things that have to occur for allocative efficiency to occur?
-no economies of scale
-markets were simultaneously in equilibrium
-there were competitive markets for all goods and services including future markets
Is a allocative efficiency a real life concept or a theoretical concept?
A theoretical concept-is impossible for all conditions to be met and perfectly competitive markets don’t exist
What is the 4th condition of allocative efficiency
When P=MC there can be no externalities (positive or negative)
For allocative efficiency price must equal
Marginal social cost not marginal private cost
When externalise exist what happens to the market mechanism and why?
Fails to produce an allocatively efficient outcome because private firms only take into account their private benefits and costs and not social
