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Econ Higher > Externalities > Flashcards

Externalities Flashcards

1
Q

When is it efficient for the individual?

A

When marginal private cost equals marginal private benefit

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2
Q

What is an externality?

A

A cost or benefit that one imposes on an unintended 3rd party

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3
Q

When is it efficient for society?

A

When marginal societal benefit equals marginal societal cost

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4
Q

What are the two kinds of externalities?

A 
Negative externalities (external cost)
Positive externalities?
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5
Q

Where do externalities come from? Consumption or production?

A

Both

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6
Q

What is the private cost of production of a car? (for producer)

A

Summation of wages, rent, interest and profit

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7
Q

What is the societal cost of production of a car?

A

Summation of wages, rent, interest and profit AND pollution

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8
Q

So with negative externalities of production, is more or less produced than would benefit society?

A

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.

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9
Q

Where is the market failure with negative externalities of production?

A

MSB > MSC so overproduction which leads to market failure. The government needs to intervene.

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10
Q

What are the governments solutions to negative externalities of production?

A
  1. Tax
  2. Government regulation/ban
  3. Tradable Permit Market
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11
Q

How would a tax work to decrease negative externalities of production?

A

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.

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12
Q

Problems of a tax to decrease negative externalities of production?

A
  • 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
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13
Q

What are the problems with govt. regulation or banning to decrease negative externalities of production?

A
  • Job loss
  • Smuggling
  • Production will move somewhere else
  • If you ban something you lose the benefit it gives to society
  • Black market
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14
Q

What are the positives and negatives with tradable permit markets to decrease negative externalities of production?

A

• 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

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15
Q

Examples of positive externalities of production?

A

Healthcare, Education, infrastructure

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16
Q

Is marginal social cost or marginal private cost bigger with positive externalities of production?

A

Marginal private cost is bigger than marginal social cost

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17
Q

What does this disparity in positive externalities of production lead to?

A

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.

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18
Q

What does the triangle on the graph showing positive externalities of production show?

A

Potential gain to society

If you move to QE you will gain this

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19
Q

Government solutions to positive externalities of production?

A
  1. Subsidies

2. Offer something for free if it has a positive externality (e.g. education)

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20
Q

Downside of subsidies as a solution to positive externalities of production?

A
  • The subsidy needs to equal the positive externality but this is difficult to measure
  • Costly
  • opp cost, money could be spent somewhere else
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21
Q

Downside of offering things with positive externalities for free as a solution to positive externalities of production?

A

Costly, puts a burden on tax payers

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22
Q

Examples of a negative externality of consumption?

A

Cigarettes with the externality being second hand smoke and healthcare (if universal)

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23
Q

With negative externalities of consumption, at QE is MPC or MSC greater?

A

MSC = MPC

24
Q

With negative externalities of consumption, at QE is MPB or MSB greater?

A

MPB > MSB

25
Q

With negative externalities of consumption, is the product over produced or under produced?

A

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.

26
Q

Solutions to negative externalities of consumption?

A
  1. Tax the product
  2. Negative advertising
  3. Public rehabilitation
  4. Ban the industry
27
Q

Problems with taxing the product as a solution to negative externalities of consumption?

A
  • Difficult to measure, tax must equal negative externality cost
  • Black market
  • Push industry out
  • Job loss
  • Might not work because of addiction
28
Q

Problems with negative advertising as a solution to negative externalities of consumption?

A
  • Costly

* Doesn’t work in short run because of addiction

29
Q

Problems with public rehabilitation as a solution to negative externalities of consumption?

A

• Costly to the tax payer

30
Q

Problems with banning the industry as a solution to negative externalities of consumption?

A
  • No benefit reaped
  • Job loss
  • Black market, especially if the good is addictive
  • Production moves out
31
Q

Give an example of a positive externality of consumption?

A

Education

32
Q

with positive externalities of consumption, is MPB or MSB greater??

A

MSB is greater

33
Q

solutions to positive externalities of consumption?

A
  1. Subsidies
  2. Government give it for free
  3. Positive advertising
34
Q

Problems with subsidies for positive externalities of consumption?

A
  • Costly
  • Difficult to measure how much to subsidise, sub must equal positive externality
  • Always an opp cost with subs
35
Q

Problems with government offering it for free for positive externalities of consumption?

A

• Costs tax payers money

36
Q

Problems with positive advertising for positive externalities of consumption?

A

Costly

37
Q

What is a merit good?

A

A good that has positive externalities and as a result society thinks that the good is under produced or consumed

38
Q

What is an example of a merit good?

A

Education, vaccines healthcare

39
Q

What will happen if there is a massive positive externality?

A

The government will provide it for free

40
Q

What is a demerit good?

A

A good that has negative externalities, so as a result, society thinks that the food is overproduced/consumed.

41
Q

Examples of demerit goods?

A

Smoking/pollution

42
Q

What will happen if there is a massive negative externality?

A

The government will ban the production and consumption of it

43
Q

What is sustainability?

A

Using and benefiting from resources in a way that make them available for future generations to benefit from them as well.

44
Q

What are non-renewable resources?

A

Can run out, they are used at a rate faster than they are renewed

45
Q

Why do we need the government to intervene in terms of sustainable?

A

In order to benefit and save for the future

46
Q

What are common access resources?

A

A resource that everyone is allowed to use (public)

47
Q

What is likely to happen to common access resources?

A

Everyone will use them until MPB = MPC and the resource will be overused and drained.

48
Q

Should the government intervene with common access resources?

A

Yes.

49
Q

How should the government intervene with common access resources?

A
  1. Privatise it
  2. Permits
  3. Make it cost a lot
50
Q

How is privatising common access resources sustainable?

A

Owners will limit use as its in their own interest.

51
Q

What are fossil fuels?

A

Finite, cheap because of technology, overused

52
Q

What should not be left to the market or else there will be overconsumption?

A
  • Non-renewable resources
  • Common access resources
  • Fossil fuels
  • Environment
53
Q

What is asymmetric info?

A

If producers and consumers don’t have the same amount of info.

54
Q

Who usually has more information about something, producers or consumers?

A

Producers

55
Q

What does asymmetric info lead to?

A

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

Econ Higher (23 decks)

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