Market Failures and Externalitis

Question 1

What factors contribute to market failure?

Answer 1

Absent or weak property rights
Public goods / common property characteristics
Externalities
Type of market structure, e.g. monopoly or oligopoly - imperfect competition leads to regulated utilities

Question 2

What is an externality

Answer 2

An externality is the uncompensated impact of one person’s actions on the wellbeing of another person

Question 3

What is a positive externality

Answer 3

beneficial impact, e.g. a neighbour’s beautiful flower garden, biodiverse habitat

Question 4

What is a negative externality

Answer 4

–adverse impact, e.g. noise from the A47, increased flooding risk from a development

Question 5

Assumptions of a private agent

Answer 5

Agents are rational and only consider the private impacts of their actions

Question 6

Why do externalities occur

Answer 6

Self-interested buyers and sellers neglect the external costs or benefits of their actions, so the market outcome is not efficient

Question 7

Example of external costs of production

Answer 7

noise and air pollution from factories / energy utilities

Question 8

Example of external costs of consumption

Answer 8

emissions from driving, noise pollution

Social benefit of consumption < private benefit

Question 9

How do you calculate social cost

Answer 9

private + external cost

Question 10

What is meant by “Internalizing the Externality”

Answer 10

Altering incentives so that agents take account of the external effects of their actions. When market participants must pay social costs, market equilibrium = social optimum.

Question 11

Is the social cost caused by negative externalities greater or smaller than the private cost (and position on graph)

Answer 11

They are greater and the line shifts left and up

Question 12

How to calulate marginal social cost

Answer 12

It is the triangle formed from the points between where 1. the msc cuts through the D

2. where the PC cuts through the D (the original market equilibrium
3. and the point formed by drawing a straight line up from the original market eq. to the MSC line

Question 13

In the presence of a positive externality, what does the social value of a good include

Answer 13

private value – the direct value to buyers

external benefit – the value of the positive impact on bystanders

Question 14

Why do we want to find the socially optimal Q

Answer 14

It is the quantity where welfare is maximised

Question 15

What can we conclude if Q is lower or higher than the social optimum

Answer 15

At any lower Q, the social value of additional units exceeds their cost
At any higher Q, the cost of the last unit exceeds its social value.

Question 16

What is the marginal social benefit? MSB

Answer 16

the benefit society receives when an additional unit of a commodity is produced

Question 17

What is the MSC marginal social cost

Answer 17

the cost of producing an additional unit of a commodity that is paid by society.

Question 18

When accounting for the social cost caused by production positive externalities, which way will the line shift

Answer 18

The cost (supply) line will shift down and right

Question 19

When accounting for the social benefit caused by consumption positive externalities, which way will the line shift

Answer 19

The benefit (demand) line will shift upwards

Question 20

Why worry about negative externalities

Answer 20

They externalities impose external costs / spillover costs, on third parties for which no appropriate compensation is paid. his means the market is not operating efficiently

Question 21

Why are externalities a cause or market failure

Answer 21

the price mechanism does not account for the social costs / social benefits of production and consumption

Question 22

how can externalities by internalised

Answer 22

through government intervention

Question 23

Explain negative and positive externalities in terms of supply relative to the social optimum

Answer 23

Negative externalities: private markets over-supply relative to the social optimum
Positive externalities: private markets under-supply relative to the social optimum

Question 24

Give examples of private costs of wind energy

Answer 24

Labour
installation
cost of land and planning permission
cost of manufacturing the turbines

Question 25

Give examples of external costs of wind energy

Answer 25

visual pollution
installation and transport congestion
falling of property prices

Question 26

Give examples of private benefits of wind energy

Answer 26

cheaper electricty in the long term

less impact on personal health compared to fossil fuels

Question 27

Give examples of external benefits of wind energy

Answer 27

better air quality
employment created - multiplier effect
technology used can be transported overseas
lower taxpayer subsidies

Question 28

Advantage to grandfathering

Answer 28

it is easy, simple and popular with big influential companies who hold a lot of political sway

Question 29

Disadvantage to grandfathering

Answer 29

It is based on that companies previous emissions; if they know permits will be handed out, they will over pollute to get more .
Giving them the property right to pollute in the form of a permit, which they can defend with a lawyer