Externalities

Question 1

What are external costs?

Answer 1

Negative spillover effects of consumption or production - affecting third parties in a negative way

Question 2

What are external benefits?

Answer 2

Positive spillover effects of consumption or production which benefits third parties.

Question 3

How does education benefits third parties?

Answer 3

By receiving education => gains more knowledge => increased skilled workers and better efficiency => more unemployment and positive economic growth

Question 4

How does free healthcare benefits third parties?

Answer 4

Proving healthcare => less ill people and workers => less absences which leads to decreased delays in production and overall increased productivity and effective over positive economic growth

Question 5

How does vaccination benefits third parties?

Answer 5

Vaccination => prevents spreading to many people => better focus on improvement of own selves

Question 6

Formula for social cost

Answer 6

Private cost + External costs

Question 7

Social benefits formula

Answer 7

Private benefits + External benefits

Question 8

How many government policies are there to deal with externalities?

Answer 8

5 (Taxation, Subsidies, Fines, Government regulations, Pollution permits)

Question 9

Advantages of dealing externalities with taxation

Answer 9

1) Production cost is increased => reduced production

2) prices will be higher => less demands => decrease in sales

3) From taxing => increase in revenue gained for government

4) The revenue gained from taxes can be reused in programs supporting reduction of pollution

Question 10

Disadvantages of taxation method

Answer 10

1) difficult to measure the level of negative externalities => hard to impose the amount for taxes

2) Low taxation rates => continued production (pollution not reduced)

3) Tax imposed after environment has already damaged

4) Tax evasion

5) Demand not decreasing

Question 11

Advantages of using the subsidies method

Answer 11

1) can be used as an incentive to reduce external costs

2) can be given to firms that generate external benefits

3) can be used to subsidies education => higher education and improved knowledge in society

Question 12

Disadvantages if we use the subsidies method

Answer 12

1) opportunity cost => could be spent on more functions in the country

2) gained from taxes => reduce incentives to work

3) difficult to estimate the extent of positive externality

Question 13

Advantages of using fines

Answer 13

1) Business will face with high production costs => reduce the activities that pollutes environment

2) raise prices due to high production costs => less sales

3) spreads awareness to the nearby businesses

Question 14

Disadvantages of using fines

Answer 14

1) Monitoring costs and time consuming

2) Already has damaged the environment before imposing fines

3) Business obtains high profits => fine not enough / ineffective

Question 15

Advantages of making government regulations

Answer 15

1) laws can have fines/penalty so business might reduce their toxic emissions

2) since laws can’t be changed instantly so, environment will be protected till the laws gets erased off

Question 16

Disadvantages if we use government regulations to reduce externalities

Answer 16

1) uneasy to make companies and people obey the laws and regulations

2) monitor all the time which are highly costed

3) Lack the commitment to enforce laws

4) not enough resources for enforcement

5) powerful companies might go against the laws

Question 17

Advantages of using pollution permits

Answer 17

1) can sell them back to other business and gain profit if discovered a way to reduce pollution

2) inventions of new technology on reducing pollution

Question 18

Disadvantages of using pollution permits

Answer 18

1) Have to decide on amount of permits to issue

2) Difficult to measure pollution levels => end up giving more or less pollution permits

3) High costs and businesses may disguise levels of pollution if difficult to measurel