micro 10- positive and negative externalities

Question 1

define market failure

Answer 1

when market mechanism fails to allocate resources efficiently

Question 2

define externalities

Answer 2

occur when producing or consuming a good causes impact on third party, not directly related to transaction

Question 3

describe negative production externalities

Answer 3

cost to third parties of production
- e.g. factory pollution emissions and deforestation
- when MSC>MPC

Question 4

describe process of negative production externalities

Answer 4

• 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

Question 5

describe negative externalities in consumption

Answer 5

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

Question 6

describe process of negative externalities in consumption

Answer 6

• 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

Question 7

describe positive externalities in consumption

Answer 7

• 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

Question 8

describe process of positive externalities in consumption

Answer 8

• 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

Question 9

describe positive externalities in production

Answer 9

• 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

Question 10

describe process of positive externalities in production

Answer 10

• 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

Question 11

how does gov tackle negative externalities

Answer 11

• 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

Question 12

taxing negative externalities

Answer 12

• 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

Question 13

subsidizing positive externalities

Answer 13

• 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

Question 14

define property rights

Answer 14

legal rights to ownership or use of an economic resource
= used to avoid market failure and negative externalities

Question 15

process of property rights

Answer 15

• 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

Question 16

problems with allocation of property rights

Answer 16

• 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

Question 17

define demerit goods

Answer 17

people underestimate costs and negative externalities of goods= lead to overconsumption
e.g. drugs and alcohol

Question 18

define merit goods

Answer 18

people underestimate benefits and positive externalities of goods= leading to under consumption
e.g. education

Question 19

causes of merit goods

Answer 19

• imperfect info- info failure= unclear about real benefits
• asymmetric info= not evenly distributed

Question 20

causes of demerit goods

Answer 20

imperfect info= info failure
- asymmetric info

Question 21

effects of demerit goods

Answer 21

• 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

Question 22

effects of merit goods

Answer 22

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

Question 23

define quasi-public goods

Answer 23

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

Question 24

define private good

Answer 24

good that has rivalry and excludability
- e.g. when coke sold to individual others cant consume it

Question 25

define rivalry

Answer 25

one person’s consumption diminishes someone else’s consumption

Question 26

define excludability

Answer 26

means its possible to exclude some individuals from consuming goods
= if you don’t have enough money to buy coke, you cant consume it

Question 27

describe a public good

Answer 27

contains traits of non-rivalry and non-excludability
goods that aren’t charged

Question 28

define non-rivalry

Answer 28

one person’s consumption doesn’t diminish someone else’s
- e.g. benefiting from a street light doesn’t reduce light for others

Question 29

define non-excludability

Answer 29

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

Question 30

describe free-rider problem

Answer 30

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

Question 31

define indirect taxes

Answer 31

tax charged on producers of goods, paid by the consumer indirectly eg VAT, excise duties (cigarette, alcohol tax)
- increases marginal costs of supply

Question 32

define regressive taxes

Answer 32

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

Question 33

adv of indirect taxes

Answer 33

• 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

Question 34

disadv of indirect taxes

Answer 34

• 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

Question 35

define subsisidies

Answer 35

form of gov financial support offered to producers to decrease MC of supply to increase sales at lower market price

Question 36

adv of subsidies

Answer 36

• help families to buy neccessities like food
• decrease cist of training staff and employment
• encourage innvoation like tech and renewable energy

Question 37

disadv of subsisidies

Answer 37

• producers become ‘subsidy dependent’
• can distort resource allocation
• can lead to production surplus= cause environmental risks
• can be expensive= opportunity cost of gov spending