Chapter 5-6 Externalities Flashcards

1
Q

Real-life examples of negative consumption externalities? (government regulation)

A

Cigarette as demrit good
HK ban smoking in indoor area since 2020

strengths:
create net saving by helping people kick the habit
saving could be used else where for other government policy

Limitations
cost on treatment for those who quit smoking

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2
Q

Define demerit good

A

A good considered to be undesirable to consumers but is over-provided by the market

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3
Q

Define negative/positive consumption/production externalities

A

Positive/ negative externalities occurs when the actions of producer/consumer give rise to positive/ negative side-effect on third parties, and whose interest are not taken into consideration.

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4
Q

Define common pool resources

A

Common access resources are resource that are not owned by anyone, do not have a price and are available for everyone to use without payment or any other restrictions
e.g. clean air, fish in the open sea

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5
Q

Features of common pool resources

A

Non-excludable: it is not possible to exclude someone from using a good or resources

Rivalrous: its consumption by one person reduces its availability for others

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6
Q

Define the tragedy of common

A

dilemma posed when common resources are used or degraded rapidly by pirvate individuals who enjoy the short-term benefits of the resources, but who are ignorant or neglectful of its long-term depletion

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7
Q

Define sustainability and sustainability production

A

sustainability refers to the use of resources in ways that do not result in fewer or lower-quality resources for future generations

sustainability production refers to production that uses resources unsustainably depleting or degrading them

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8
Q

What is collective self-governance.

A

It refers to a solution to the use of common pool resources where the users take control of the resources and use them in a sustainable way
-which is not a policy imposed by the govenment
-but undertaken by the communities who use the resources
-oppose to the concept of the tragedy of the commons

why users of a common pool resource culd find solutions on how to manage the resources sustainably
-they make rules and enforce the rules themselves
-two necessary conditions: 1. there must be boundaries for the resources, 2. users must be able to communicate with each other

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9
Q

Define market failure

A

Market failure refers to the failure of the market to allocate resources efficiently

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10
Q

Take the production of factories as an example, why this is a negative production externality.

A

Fcatories production cause pollution to the environment
External cost is the damage to the ecosystem/fishing industry
marginal private cost is greater than marginal social cost
difference between MSC and MPC is the external cost
Q optimum < Qm (market)

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11
Q

Explain and evaluate the solution of indirect tax on output in negative production externality

A

aim: tax=external cost
MPC+ tax = MSC
Qm=Qopt

strengths:
Internalize the external cost
Generate tax revenue

weaknesses:
Difficulty in measuring the numerical value of external cost
Regressive: lower income people have to pay a higher proportion of their income
Ineffective when facing inelastic demand

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12
Q

Explain and evaluate the effect of carbon tax in negative production externality

A

MPC decrease since tax is imposed
MSC increase since firms are willing to switch to a cleaner method of production
new Qopt= new Qm

Strengths:
Internalize the cost
Generate tax revenue
Provide incentive for producers to reduce amount of pollution
Pollution less, the cost that the society have to bear is reduced

Weaknesses:
Technical and practical difficulties
Regressive
Inelastic demand

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13
Q

Define tradable permit

A

Tradable permit is the policy involving permit to pollute issued to firms by the government. It can be traded in the market.

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14
Q

Explain and evaluate the effect of tradable permit in negative production externality

A

Firm change cleaner method even if they have the permit, since they can sell the permit
MPC decrease
MSC increase

Strengths:
Internalize the cost
Provide incentive
Lower social cost

Weaknesses:
Difficulties in measuring external cost
Have to set a maximum acceptable level of pollution
Have to distribute the permits to firms in a fair way

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15
Q

Explain and evaluate the effect of government regulation and legislation in negative production externality

A

Regulation on emission
Regulation on using cleaner production method
Regulation on output
Production cost increase, MPC shift upward
MSC shift downward

Strengths:
Simple to put effect
Easier to implement, no need to find numerical value of external cost
Most effective to reduce pollution (sometimes)

Weaknesses:
Do not offer incentive to switch alternative method
Cost of monitoring
Regulation cause unable to adapt when circumstances change, less competitive against foreign producers

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16
Q

Explain and evaluate education in negative production externality

A

Educate consumers
Aware of the negative impacts of pollution of firms
Reduce consumption of firms with pollution
Firm switch to cleaner method
MPC shift upwards

Strengths:
Firm production decisions influenced a lot by consumers’ opinions to prevent a drop in sales

Weaknesses:
Cannot be applicaed on externalities like the use of fossil fuels

17
Q

Explain and evaluate the effect of indirect tax in negative consumption externality

A

MPC shift upwards
Qopt= Qm

Strengths:
Internalize the cost
Generate tax revenue
Provide incentive to switch consumption pattern

Weaknesses:
Difficulties in measuring external cost
Ineffective when facing inelastic demand
Underground market

18
Q

Explain and evaluate the effect of government regulation and legislation in negative consumption externality

A

MPB shift to the left

Strength:
very effective to reduce external cost

Weakness:
Difficult to deal with some kinds of negative externalities, e.g. petrol consumption

19
Q

Explain and evaluate the effect of education in negative consumption externality

A

MPB shift to the left

Strength:
Change behaviour in long term

Weakness:
May be unable to reduce negative externality

20
Q

Explain and evaluate the effect of government provision in positive production externality

A

MSC > MPC
Qopt > Qm, underprovided by the market
Government provision -> MPC shift downwards, Qm = Qopt

Strength:
Price decrease

Weakness:
Use of government capital

21
Q

Explain and evaluate the effect of subsidies in positive production externality

A

MPC shift downward

Strength:
Price decrease

Weakness:
Use of government capital
Difficult to measure the external benefit

22
Q

Explain and evaluate the effect of government direct provision in positive consumption externality

A

MPC shift downwards

Strength:
Price decrease

Weakness:
Use of government capital

23
Q

Explain and evaluate the effect of subsidy in positive consumption externality

A

MPC shift downwards

Strength:
Price decrease

Weakness:
Use of government capital
Difficult to measure external benefit

24
Q

Explain and evaluate the effect of government regulation in positive consumption externality

A

MPB increase, then MPB=MSB

Strength:
Most effective way to increase consumption

Weakness:
Market price increase

25
Q

Explain and evaluate the effect of education in positive consumption externality

A

MPB increase

Strength:
Lower cost
Easy to implement

Weakness:
Market price increase
Ignore the education, may be ineffective