Externalities - Gov Policy Flashcards
Why do environmental externalities occur?
due to lack of property rights
what are property rights and why are they exploited
they define ownership of resource and enviro resources are open access, not privately owned
there is no price to restrict use so they can be exploited and overused (no incentive to use in a socially optimal way)
what will be the market outcome in the presence of externalities
market outcome will be inefficient - optimal quantity wont be produced and price may not reflect true value of resources used in production
what should gov do for each type of ext
reduce production of goods causing neg ext
increase consumption of goods creating pos ext
how should gov policy help this
needs to internalise the externality (force the mkt to recognise and include ext cost/benefit in mkt price)
what does the negative ext policy impose
tax should be placed on the producer to reduce output (giving incentive to firm to reduce pollution to lower tax bill)
explain the neg ext policy in terms of the pollution example
pollution tax can be inputted which would be equal to external cost (increasing private costs shifting private supply curve to coincide with social supply)
when negative ext policy is imposed what happens
price is increased and output is decreased - correcting the market failure by forcing firm to pay their external cost
what does the positive ext policy impose
subsidy should be payed by gov to consumer that equals external benefit
when positive ext policy is imposed what happens
shifts market eql to become efficient as the subsidy reduces thr price paid by consumers and increases consumption
On the graph what does the neg ext policy move and where does eql become
Sp -> Ss due to tax
goes to PeQe because of the tax amount (PeP1)
On the graph what does the pos ext policy move and where does eql become
Dp -> Ds due to subsidy
goes to PeQe because of the subsidy amount (PeP2)
