Market f Flashcards
2 types of inefficacies
Production and exchange
Government Failure of the I Type
Failing to intervene when intervention could realistically promote efficiency.
Government Failure of the II Type:
Government intervention makes things worse, leading to a less efficient situation than before intervention. This is sometimes referred to as the ‘Cobra Effect.’
Government Failure of the I Type example
During the 1950s, Britain experienced severe air pollution, notably the Great Smog of London in 1952, which caused thousands of deaths and raised public awareness about air quality issues.
Government Failure of the II Type (‘Cobra Effect’) example
The Greek government implemented measures such as alternating-day driving restrictions based on license plate numbers to reduce traffic congestion and pollution.
This policy led to households buying second cars with alternate license plates to circumvent the restrictions, thereby increasing the total number of vehicles on the road. This resulted in worse traffic congestion and higher levels of pollution than before the intervention.
Two Fundamental Characteristics of Goods
Exclusivity and rivalry
Excludability
A good or bad is excludable if it is possible to prevent individuals from consuming it unless they pay for it.
Rivalry
If a good is rival, the consumption by one individual imposes a social opportunity cost on others, as it reduces the available quantity.
what makes a good private
A good/bad that is both rival and excludable is a
PRIVATE good/bad.
what makes a good public
A good/bad that is both nonrival and
nonexcludable is a PUBLIC good or bad.
externality definition
consumption or production choices of one person
or firm enter the utility or production function of
another entity without that entity’s permission or
compensation.
why are externalities of a Public Bad bad
When a public bad is created, its non-rival nature means that the negative impact is an externality affecting all individuals in the area. For example, a factory emitting pollutants creates a public bad (polluted air) that everyone breathes, creating a negative externality.
why is the marginal social benefit of pollution same as private
In the case of pollution, there are typically no positive externalities associated with the act of polluting itself. The private benefit to the polluter (e.g., reduced production costs) does not translate into a broader social benefit. Therefore, the MSB purely reflects the private gain.
The marginal abatement cost meaning
Definition: The marginal abatement cost represents the cost of reducing (abating) one additional unit of pollution or negative externality. It measures the economic cost of actions or technologies that decrease environmental harm.
The double dividend hypothesis
The double dividend hypothesis suggests that implementing an environmental tax can lead to two benefits, or “dividends.”
First Dividend: The tax helps improve the environment by reducing pollution or harmful activities.
Second Dividend: The revenue from the environmental tax can be used to reduce other taxes, like those on labor. Labor taxes can make hiring workers more expensive, leading to fewer jobs. By reducing these taxes, the economy could become more efficient, leading to better employment levels and overall economic health.
This idea makes environmental taxes seem like a “no-regret policy” or a “win-win solution” because they could both protect the environment and boost the economy.
Disadvantage of taxes
This concern is central to the debate on using carbon taxes to reduce CO2 emissions, particularly when these taxes are applied directly to households.
Direct CO2 taxes: These are related to energy consumption, so poorer households, which spend a larger share of their income on energy, end up paying more relative to their income.
Indirect CO2 taxes: These show up in the prices of goods like water, travel, and certain foods, again impacting low-income households more heavily.
This regressive impact is a significant point of contention in discussions about implementing carbon taxes.
successive approximation meaning
-
Unknown Marginal Damage Function:
- Regulators might not always know the marginal damage function (how each additional unit of emission damages the environment).
-
Strategy to Set Tax:
- One strategy is to set an initial tax and observe the impact on ambient quality (pollutant concentration in the environment).
- If emissions decrease but not enough, the tax can be increased.
- If emissions decrease too much, the tax can be decreased.
- This is a process of successive approximation to find the optimal tax rate over time.
