micro 10- positive and negative externalities Flashcards
define market failure
when market mechanism fails to allocate resources efficiently
define externalities
occur when producing or consuming a good causes impact on third party, not directly related to transaction
describe negative production externalities
cost to third parties of production
- e.g. factory pollution emissions and deforestation
- when MSC>MPC
describe process of negative production externalities
- firms ignore social costs and focus on private costs due to self interest
= produce goods at P1 and Q1 (private optimum)
= lead to over production and over consumption
= price will be too low= makes problem worse as consumption will increase more= lead to misallocation of resources
= lead to social welfare loss
describe negative externalities in consumption
costs to third party of consumption
- e.g. consumption cigarettes= other ppl breath in smoke= increase lung cancer, alcohol consumption= increase police services time and healthcare services
- MSB<MPB
describe process of negative externalities in consumption
- all goods produced Q star are being over produced at higher social cost= loss to society
- consumers ignoring full social benefits of actions and focus on private benefit due to self interest
- lead to market allocating resources to P1+P2 where MPC cuts MPB
= lead to over consumption and over production
= lead to misallocation of resources
= result in allocative inefficiency and welfare loss to society
describe positive externalities in consumption
- benefits to third party, result of consumption
- e.g. vaccinated against illness= decrease third party risk, education= society benefit from more employees and tax increase to go= spend on infrastructure etc
- MSB>MPB
describe process of positive externalities in consumption
- Q1 SB>SC= by not producing extra units society missing out on potential extra social benefit
= individual consumers ignoring SB of actions, focused on PB
= market allocates scarce resources at private optimum
= lead to under consumption and under production compared to what society want
= lead to misallocation of resources and allocative inefficiency
describe positive externalities in production
- benefits to third party, result of production
- e.g. third party could be a firm who finds employees who have high quality training from other producers= save time and money
- MSC<MPC
describe process of positive externalities in production
- individual producers/firms only consider PC not their full SC
= resources allocated at private optimum= under production and under consumption
= lead to misallocation of resources
how does gov tackle negative externalities
- regulatory bodies for specific industries help monitor and fine companies if cause negative externalities
- legislate a ban of demerit goods= if made punishment takes place
taxing negative externalities
- increasing taxes= decreasing profits of suppliers= decrease production= supply shift left
- minimum price will decrease market quantity back to social optimum when implemented
- gov can sponsor campaigns to educate consumers on effects of demerit goods
= will decrease demand to point where quantity drops to Q2
subsidizing positive externalities
- subsidies are a form of support given to producers that reduce costs of production
-subsidies incentivize firms to develop/supply more products with positive externalities
= increase profits in industry and shift supply outwards
= cause market price decrease and increase quantity to social optimum (Q2)= solve market failure
define property rights
legal rights to ownership or use of an economic resource
= used to avoid market failure and negative externalities
process of property rights
- private producer will own resource like a forest= incentivise producer to not exploit common access to resources as impact will be on producer personally= lead to loss of income in future
- negative externalities will be internalised for producer only
= if enforced will decrease quantity at socially optimum level= increase social welfare and reach allocative efficiency
problems with allocation of property rights
- cant give property rights for chunks of air and sea= cant be efficiently distributed
- enforcement will be needed= expensive for gov to issue but wo enforcement scheme will break down
- equity problems= who gets the rights
define demerit goods
people underestimate costs and negative externalities of goods= lead to overconsumption
e.g. drugs and alcohol
define merit goods
people underestimate benefits and positive externalities of goods= leading to under consumption
e.g. education
causes of merit goods
- imperfect info- info failure= unclear about real benefits
- asymmetric info= not evenly distributed
causes of demerit goods
imperfect info= info failure
- asymmetric info
effects of demerit goods
- will be negative externalities of consumption of some demerit goods
- e.g. cigarettes= ppl who smoke cigs don’t know exact probability of lung cancer chances
= lead to irrational decisions of over consumption of demerit goods
effects of merit goods
cause positive externalities in consumption
- e.g. healthcare, education= ppl know benefits of consuming education but not full potential benefit of consumption like future income
= lead to irrational decisions of under consuming education
= lead to under consumption and under production of merit goods
define quasi-public goods
goods which have an element of non-excludability and non-rivalry
- eg roads= once provided most people can use them but when you use a road, amount others can benefit will decrease to some extent due to increased congestion
define private good
good that has rivalry and excludability
- e.g. when coke sold to individual others cant consume it
define rivalry
one person’s consumption diminishes someone else’s consumption
define excludability
means its possible to exclude some individuals from consuming goods
= if you don’t have enough money to buy coke, you cant consume it
describe a public good
contains traits of non-rivalry and non-excludability
goods that aren’t charged
define non-rivalry
one person’s consumption doesn’t diminish someone else’s
- e.g. benefiting from a street light doesn’t reduce light for others
define non-excludability
not possible to exclude some individuals from consuming the good
- e.g. a dam is built to stop floods and protect everyone in the area
describe free-rider problem
when there’s over-consumption of public goods
- anyone can access public goods
= nobody willing to produce it as they cant profit of it
= lead to missing market and market failure
define indirect taxes
tax charged on producers of goods, paid by the consumer indirectly eg VAT, excise duties (cigarette, alcohol tax)
- increases marginal costs of supply
define regressive taxes
tax imposed by gov that takes a higher percentage of someone’s income from those on low incomes= means those with lower incomes pay more in tax relative to their income
adv of indirect taxes
- source of revenue to pay for gov spending
- used to change consumer and producer behaviour
- help address examples of market failure
- de-incentivise supply and consumption of demerit goods
disadv of indirect taxes
- taxes may be regressive on low income families
- more effective policies can be used like behavioural nudges
- risk loss of jobs
- can encourage tax evasion
define subsisidies
form of gov financial support offered to producers to decrease MC of supply to increase sales at lower market price
adv of subsidies
- help families to buy neccessities like food
- decrease cist of training staff and employment
- encourage innvoation like tech and renewable energy
disadv of subsisidies
- producers become ‘subsidy dependent’
- can distort resource allocation
- can lead to production surplus= cause environmental risks
- can be expensive= opportunity cost of gov spending
