Externalities Flashcards
When is it efficient for the individual?
When marginal private cost equals marginal private benefit
What is an externality?
A cost or benefit that one imposes on an unintended 3rd party
When is it efficient for society?
When marginal societal benefit equals marginal societal cost
What are the two kinds of externalities?
Negative externalities (external cost) Positive externalities?
Where do externalities come from? Consumption or production?
Both
What is the private cost of production of a car? (for producer)
Summation of wages, rent, interest and profit
What is the societal cost of production of a car?
Summation of wages, rent, interest and profit AND pollution
So with negative externalities of production, is more or less produced than would benefit society?
More because producers want to reach producers equilibrium and create maximum profit, they aren’t concerned with society. If it were up to society as a whole less would be produced.
Where is the market failure with negative externalities of production?
MSB > MSC so overproduction which leads to market failure. The government needs to intervene.
What are the governments solutions to negative externalities of production?
- Tax
- Government regulation/ban
- Tradable Permit Market
How would a tax work to decrease negative externalities of production?
For this to work the tax would need to be equal to the external cost to society because a tax adds to marginal private cost.
Problems of a tax to decrease negative externalities of production?
- External cost is very hard to measure.
- It also depends on externalities, the producer could push the tax on the consumer if the good was very demand inelastic.
- Taxes also lead to job loss and black markets
What are the problems with govt. regulation or banning to decrease negative externalities of production?
- Job loss
- Smuggling
- Production will move somewhere else
- If you ban something you lose the benefit it gives to society
- Black market
What are the positives and negatives with tradable permit markets to decrease negative externalities of production?
• Good for national and international
• Government can decide how much pollution is acceptable
BUT
• hard to measure
• could hurt the economy or pollute too much, hard to get a balance
• difficult to enforce
Examples of positive externalities of production?
Healthcare, Education, infrastructure
Is marginal social cost or marginal private cost bigger with positive externalities of production?
Marginal private cost is bigger than marginal social cost
What does this disparity in positive externalities of production lead to?
Underproduction because the producers produce at a point where MPC is equal to MPB but society should produce where MSC = MSB which is at a higher production rate. For example with education society would be better off if producers provided more education but it is expensive for them so they stop at a certain point.
What does the triangle on the graph showing positive externalities of production show?
Potential gain to society
If you move to QE you will gain this
Government solutions to positive externalities of production?
- Subsidies
2. Offer something for free if it has a positive externality (e.g. education)
Downside of subsidies as a solution to positive externalities of production?
- The subsidy needs to equal the positive externality but this is difficult to measure
- Costly
- opp cost, money could be spent somewhere else
Downside of offering things with positive externalities for free as a solution to positive externalities of production?
Costly, puts a burden on tax payers
Examples of a negative externality of consumption?
Cigarettes with the externality being second hand smoke and healthcare (if universal)
With negative externalities of consumption, at QE is MPC or MSC greater?
MSC = MPC
With negative externalities of consumption, at QE is MPB or MSB greater?
MPB > MSB
With negative externalities of consumption, is the product over produced or under produced?
Over produced because the consumer buys at a level where his/her private benefit equals private cost which is a higher level than society’s equilibrium.
Solutions to negative externalities of consumption?
- Tax the product
- Negative advertising
- Public rehabilitation
- Ban the industry
Problems with taxing the product as a solution to negative externalities of consumption?
- Difficult to measure, tax must equal negative externality cost
- Black market
- Push industry out
- Job loss
- Might not work because of addiction
Problems with negative advertising as a solution to negative externalities of consumption?
- Costly
* Doesn’t work in short run because of addiction
Problems with public rehabilitation as a solution to negative externalities of consumption?
• Costly to the tax payer
Problems with banning the industry as a solution to negative externalities of consumption?
- No benefit reaped
- Job loss
- Black market, especially if the good is addictive
- Production moves out
Give an example of a positive externality of consumption?
Education
with positive externalities of consumption, is MPB or MSB greater??
MSB is greater
solutions to positive externalities of consumption?
- Subsidies
- Government give it for free
- Positive advertising
Problems with subsidies for positive externalities of consumption?
- Costly
- Difficult to measure how much to subsidise, sub must equal positive externality
- Always an opp cost with subs
Problems with government offering it for free for positive externalities of consumption?
• Costs tax payers money
Problems with positive advertising for positive externalities of consumption?
Costly
What is a merit good?
A good that has positive externalities and as a result society thinks that the good is under produced or consumed
What is an example of a merit good?
Education, vaccines healthcare
What will happen if there is a massive positive externality?
The government will provide it for free
What is a demerit good?
A good that has negative externalities, so as a result, society thinks that the food is overproduced/consumed.
Examples of demerit goods?
Smoking/pollution
What will happen if there is a massive negative externality?
The government will ban the production and consumption of it
What is sustainability?
Using and benefiting from resources in a way that make them available for future generations to benefit from them as well.
What are non-renewable resources?
Can run out, they are used at a rate faster than they are renewed
Why do we need the government to intervene in terms of sustainable?
In order to benefit and save for the future
What are common access resources?
A resource that everyone is allowed to use (public)
What is likely to happen to common access resources?
Everyone will use them until MPB = MPC and the resource will be overused and drained.
Should the government intervene with common access resources?
Yes.
How should the government intervene with common access resources?
- Privatise it
- Permits
- Make it cost a lot
How is privatising common access resources sustainable?
Owners will limit use as its in their own interest.
What are fossil fuels?
Finite, cheap because of technology, overused
What should not be left to the market or else there will be overconsumption?
- Non-renewable resources
- Common access resources
- Fossil fuels
- Environment
What is asymmetric info?
If producers and consumers don’t have the same amount of info.
Who usually has more information about something, producers or consumers?
Producers
What does asymmetric info lead to?
When sellers have more info, buyers end up paying a higher price than what is socially efficient? (P = MC, normal profit)
When buyers have more info, they pay less than what’s socially efficient
Therefore this needs government intervention
