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Economics U5 > Correcting Negative Externalities > Flashcards

Correcting Negative Externalities Flashcards

1
Q

What is the main goal of policies correcting negative externalities?

A

To reduce quantity of the good/service produced

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2
Q

What is the process required to correct negative externalities of production?

A

To correct negative externalities of production, the MPC must shift towards the MSC (i.e. decreasing supply to reduce quantity produced)

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3
Q

What is the process required to correct negative externalities of consumption?

A

To correct negative externalities of consumption:

  1. the MPC must be shifted to MSC (i.e. decreasing demand to reduce quantity produced)
  2. the MSC must be shifted leftwards (i.e. decreasing supply) which would result in a decrease in quantity produced
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4
Q

What are the three ways negative externalities of production be corrected?

A
  1. Government regulations
  2. Corrective taxes
  3. Tradeable permits
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5
Q

What are the three ways negative externalities of consumption be corrected?

A
  1. Government regulations
  2. Advertisements
  3. Corrective Taxes
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6
Q

What are government regulations?

A

Rules imposed by government, backed by penalties

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7
Q

What are 5 examples of government regulations?

A
  1. Regulation to limit emissions
  2. Regulation to limit amount of output produced
  3. Force firms to install green technology
  4. Ban dangerous substances
  5. Legal restrictions on activities such as smoking
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8
Q

What is the impact of government regulation in the case of negative externalities of production?

A
  • Limiting output and banning substances has direct impact of shifting MPC towards MSC
  • buying green technology is an extra cost on the firm and thus shifts MPC towards MSC (and whatever is produced is produced in a clean manner)
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9
Q

What is the impact of government regulation in the case of negative externalities of consumption?

A

Has the impact of shifting MPB towards MSB by limiting/restricting consumer activities that impose costs on third parties

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10
Q

What are the 3 advantages of government regulation?

A
  1. Easy to implement
  2. If demand is inelastic, government regulations are more effective (example smoking)
    - if demand inelastic, additional costs due to regulation can be passed onto consumers by producers
  3. In some cases of regulation (such as banning), there is no choice to pollute given to firms
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11
Q

What are the 5 disadvantages of government regulation?

A
  1. Does not differentiate between high polluting and low polluting firms
  2. Hard to monitor
  3. Deciding on penalties is difficult due to imperfect knowledge on extent of pollution
  4. No incentive to switch to cleaner technologies (simply pay the penalty and continue polluting)
  5. May limit competition by discouraging new firms from entering market
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12
Q

What is the impact of advertising/education on negative externalities of consumption?

A

Ideally decreases the demand for the good by informing and educating the public about its negative consequences

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13
Q

What are the 3 advantages of advertisement?

A
  1. Simple to implement
  2. Helps educate a larger audience and potentially has the impact of reducing demand
  3. Better than paying money because it is more “personalized” as people understand the harm of consuming the good/service
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14
Q

What are the 2 main disadvantages of advertisement?

A
  1. Very unlikely to reduce demand

2. Opportunity costs; funds could be diverted elsewhere

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15
Q

What are taxes?

A

A payment made by an individual or a firm to the government

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16
Q

What are the 2 types of taxes?

A
  1. Taxes per unit of output produced

2. Taxes per unit of pollutants emitted (carbon tax)

17
Q

What is the impact of tax per unit of output on negative production externalities?

A

Increases costs of production for the firm, which results in a leftward shift of MPC towards MSC (assuming amount of tax = externality)

18
Q

What is the impact of tax per unit of pollutants emitted on negative production externalities?

A

Not only does it result in a leftward shift of MPC towards MSC, it also provides firms with an incentive to switch to less polluting technologies (so to avoid taxes and increase profits)

19
Q

What is the impact of tax on negative consumption externalities?

A

Increases costs of production for firm, which results in a leftward shift of MSC. After tax, the MPC + tax intersects MSB at socially optimum quantity (but a higher price).

20
Q

What are the 5 advantages of taxes?

A
  1. Internalizes the externality (i.e. makes the producer/consumer bear the burden of the externality)
  2. Reduces external cost at a lower cost (i.e. no cost to government imposing the tax and also in the case of carbon taxes it incentivises firms to switch to green technology and increase output)
  3. Carbon taxes incentivises cleaner technology
  4. Raises revenue which can be spent to mitigate effects on pollution (especially if demand for good is inelastic)
  5. Discourages consumption
21
Q

What are the 5 disadvantages of taxes?

A
  1. Difficult to measure value of external costs and what pollutants to tax
  2. Administration costs in monitoring and collecting taxes
  3. Possibility of tax evasion
  4. Ineffective if inelastic demand, and has a regressive effect if placed on inelastic demerit goods (such as cigarettes)
  5. Can discourage investment and economic growth due to reduced output
22
Q

What are trade permits?

A

Permits to pollute issued to firms by a government

23
Q

What is the impact of trade permits in the case of negative production externalities?

A

Government issues pre-determined amount of trade permits => if a producer wishes to exceed amount permitted they must buy from other producers who can limit their pollution

Therefore, tradeable permits:

  1. Punishes those who pollute more by requiring them to pay more
  2. Incentivises firms to use cleaner sources as it can add to their revenue (by selling permits)
24
Q

What are the 4 advantages of trade permits?

A
  1. Creates strong incentive to reduce pollution
  2. Internalizes the costs
  3. Government has ability to place a clear limit on the quantity of pollution per year
  4. Price can be manipulated by reducing or increasing number of permits available
25
Q

What are the 6 disadvantages of trade permits?

A
  1. Price is determined by free market and may be too low (and demand for permits may be inelastic)
  2. Complicated to decide how many to be allowed to have an appropriate impact
  3. Firms may outsource their production
  4. Political favoritism
  5. Richer countries can buy off permits from poorer countries
  6. Costly and difficult to monitor

Economics U5 (9 decks)

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