Lesson 13-Externalities Flashcards
Define market failure
This occurs when the price mechanism cannot bring about an efficient allocation of resources leading to net welfare loss to the society.
State the two types of market failure
1.Externalities
2.Non provision of public and merit goods (missing markets)
Define externalities
Effects on a third party who is neither the producer nor the consumer
Define external cost
Costs to third parties resulting from the production or consumption of a good or service.
State two other names for external costs
1.Negative externalities
2. Negative spillover effects
State an example of external cost
Pollution by firms
Playing loud music at night
Define external benefit
Benefits to third parties resulting from the production or consumption of a good or service.
State two other names for external benifit
1.Positie externalities
2. Positive spillover effects
State an example for external benefit
Vaccination by a worker that results in high labor productivity at work and reduced absenteeism
Define private costs
Costs incurred by a firm or individual in order to produce or consume a good or service.
State 3 private costs to a firm
wages
rent
payment for raw materials
electricity
cost of production
State a private cost to a consumer
The market price that a consumer pays for a good or service
Define private benifits
The private benefits on production can be the revenue obtained by a firm and the private benefit of consumption can be the satisfaction of listening to loud music.
Define social costs
By adding private cost to external cost we obtain social cost.
Define external cost
The difference between private costs and social costs
Define social benefits
By adding private benefit to external benefit we obtain social benefit.
Define external benifit
The difference between private benefit and social benefit
Define regulation
This is where the government regulates private sector firms whereby they are requested to cut down levels of pollution and if not in extreme cases may be shut down by the government.
Advantage of taxation
The government will be able to earn from taxes.
Define Taxation
This is where the government imposes high taxes on firms that damage the environment A higher level of damage will mean that a higher rate of tax will be paid.
Disadvantage of taxation
It give an opportunity to firms to continue damaging the environment by paying taxes
Define subsidies
This is where the government offers grants, tax reliefs and subsidies to those firms whose pollution levels are generally low or to those firms that invested in environmentally friendly production methods.
Benefits of subsidies
It will act as an incentive for those firms that pollute to cut down their levels of pollution or to invest in environmentally friendly methods of production.
Define pollution permits
This is where firms are required to buy permits in order to pollute.
What is a benefit of pollution permits to a firm
Firms that reduce their pollution below the level mentioned on the permit will be able to sell these permits at a higher price to to other polluting permits
Define Fines
Can be imposed by the government on firms found guilty of polluting or damaging the environment.
Define public goods
These are goods provided by the government free of charge
What are two important characteristics of public goods
1.Non-excludability- This means that once a good has been produced for the benefit of one person it is impossible to stop others from using it.
2. Non-rivalry- This means that as more people consume a good and enjoys it benefits it does not reduce the amount available for others.
What is the free rider prolem
When one person is given something, others can use it as well for free.
State two reasons why the private sector does not provide public goods
- Non excludability
- Non rivalry
Define Merit goods
These are services provided by the government but would be under provided by the private sector. They create positive externalities.
Why are Merit goods underconsumed?
As a result of imperfect information about the benefits that can be derived.
