Externalities Flashcards
Why are goods like cigarettes, alcohol and fossil fuels taxed by the government
To make it more expensive for consumers to buy and producers to sell
This discourages usage and protects society from harmful thrid-party effects
What are externalities
Costs which affect third parties who aren’t involved in the selling, making or consuming of a good
What are negative productive externalites
Externalities caused by the production of a good
What is the supply curve equal to and why
The marginal private cost curve
Supply curve tells us the lowest price the producer would be willing to sell their good for and that is equal to marginal cost of producing said good
What is the demand curve equal to
Marginal private benefit curve
Demand curve can tell us the highest price a consumer will be willing to pay for a good which would be equal to the marginal benefit
What is the equation for social cost and social benefit
Social costs = private costs + external costs
Social benefits = private benefits + external benefits
What does the gap between MPC and MSC represent
External costs
19 - 11 = 8
What is the equation for welfare
Social benefit - Social cost
What is welfare loss
How much welfare society loses out on as a result of a negative externality
What area represents over production
What four curves do you need to draw a negative production externality diagram
MSC
MPC
MPB
MSB
What do the two points circled represent
The socially efficient equilibrium
What does a negative production externality graph look like
What happens if consumers or producers ignore external costs
Over produce and over consume
How can governments stop over producing and over consuming
Indirect taxes like specific or ad valorem taxes
At what point do governments want producers to produce at
At the socially efficient equilibrium
In terms of a negative externality diagram how does a indirect tax help society
Producer ignore external costs and operate at equilibrium
Governments put on indirect tax which makes production more costly and shifts MPC to the left to the socially efficient equilibrium
If the government wants to set a indirect tax to reach a socially efficient equilibrium what should they set the tax to
Equal to the external costs at the socially efficient equilibrium
Where on this graph represents the tax
Distance between socially efficient equilibrium and the MPC curve
How would you show the effect of a indirect tax on a product with negative consumption externalities
Tax shifts supply curve to the right and decreases quantity supplied
How would you show a negative externality being internalised on this graph
Explain how tradeable pollution permits work
Governments set a cap on the amount of pollution
Governments give permits - allowing firms to pollute at a certain amount
Gives out permits until 10% are left and then auctions them off to other firms who want to pollute more
Government raises tax revenue - can be used to subsidize eco-friendly companies and fund renewable energy
Firms can also buy and sell permits with each other
What is a minimum price
The lowest price suppliers of a good can sell for
Where are minimum prices set
Above the equilibrium
Show what a minimum price does to this graph
What does a minimum price create
Excess supply and reduced demand
What is regulation
When the government makes amendments to the law to correct market failure
What does the supply curve equal to in a positive externality diagram
MPC
MSC
On a positive externality diagram what does the vertical distance between MPB and MSB represent
The external benefits
Private benefits + external benefits
1400 + 600 = 2000
If every time someone graduates with a computer science degree it benefits local businesses by £600 then what would the MSB curve look like
£600 above the MPB line
Welfare = Social benefit - social cost
2000 - 800 = 1200
Where on this graph represents the welfare on producing the first unit
Where on this graph represents the welfare gain
What do you have to do if a question asks you about external benefits of consumption or positive consumption externalities
Draw a positive consumption externality diagram
What happens if producers and consumers don’t consider the external benefits of their actions
Underproduction and underconsumption
What does recieving a subsidy to the supply curve
Shift it to the right
Where does a maximum price belong a supply and demand diagram
Below market equilibrium
What does a maximum price below the market equilibrium create
Excess demand
Shortage of supply
How would you show a maximum price on this graph
