Chapter 5-6 Externalities Flashcards
Real-life examples of negative consumption externalities? (government regulation)
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
Define demerit good
A good considered to be undesirable to consumers but is over-provided by the market
Define negative/positive consumption/production externalities
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.
Define common pool resources
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
Features of common pool resources
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
Define the tragedy of common
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
Define sustainability and sustainability production
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
What is collective self-governance.
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
Define market failure
Market failure refers to the failure of the market to allocate resources efficiently
Take the production of factories as an example, why this is a negative production externality.
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)
Explain and evaluate the solution of indirect tax on output in negative production externality
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
Explain and evaluate the effect of carbon tax in negative production externality
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
Define tradable permit
Tradable permit is the policy involving permit to pollute issued to firms by the government. It can be traded in the market.
Explain and evaluate the effect of tradable permit in negative production externality
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
Explain and evaluate the effect of government regulation and legislation in negative production externality
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
Explain and evaluate education in negative production externality
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
Explain and evaluate the effect of indirect tax in negative consumption externality
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
Explain and evaluate the effect of government regulation and legislation in negative consumption externality
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
Explain and evaluate the effect of education in negative consumption externality
MPB shift to the left
Strength:
Change behaviour in long term
Weakness:
May be unable to reduce negative externality
Explain and evaluate the effect of government provision in positive production externality
MSC > MPC
Qopt > Qm, underprovided by the market
Government provision -> MPC shift downwards, Qm = Qopt
Strength:
Price decrease
Weakness:
Use of government capital
Explain and evaluate the effect of subsidies in positive production externality
MPC shift downward
Strength:
Price decrease
Weakness:
Use of government capital
Difficult to measure the external benefit
Explain and evaluate the effect of government direct provision in positive consumption externality
MPC shift downwards
Strength:
Price decrease
Weakness:
Use of government capital
Explain and evaluate the effect of subsidy in positive consumption externality
MPC shift downwards
Strength:
Price decrease
Weakness:
Use of government capital
Difficult to measure external benefit
Explain and evaluate the effect of government regulation in positive consumption externality
MPB increase, then MPB=MSB
Strength:
Most effective way to increase consumption
Weakness:
Market price increase
Explain and evaluate the effect of education in positive consumption externality
MPB increase
Strength:
Lower cost
Easy to implement
Weakness:
Market price increase
Ignore the education, may be ineffective
