externalities Flashcards
what is a negative externality
where a 3rd party is harmed by an action of a firm
what is a positive externaity
when an entity gains welfare unintentionally from the actions of a firm
why are negative externalities overproduced compared to their social optimum
companies are not forced to pay for the harm they cause
why are positive externalities underproduced compared to their social optimums
companies are not compensated for the positive externalities benefit on society
what is the socially optimum point to produce a negative externality
Marginal social cost + Marginal private cost
why does the competitive equilibrium not maximise consumer and producer surplus
because of pollution
when is welfare maximised in a negative externality market
where P = social MC
why does dead weight loss result
the competitive market equates price to private MC
how does a market reach the social optimum not the private one
government intervention , e.g price floor, taxes, restricting pollution/production directly
what are 2 problems with government intervention in negative ext markets
enforcing rules set should they be broken
knowing at what level to intervene at, not set the bar to high or low
if the government had complete information what level would it set its tax to to internalise the externality
MC of pollution
how may a monopoly negative ext market differ from a competitive one
a monopoly may produce less goods than the social optimum goods as it only regards its profit
when is welfare greater with a negative ext. should both markets produce more than the social optimum
in a monopoly market not competitive market
how can a tax harm welfare if placed on a monopoly producing a negative ext.
if the firm is producing less than the social optimum
how does a government increase welfare in a monopoly market underproducing a negative externality
subsidise the firm
