micro 18 - externalities Flashcards
why do government intervene in markets?
Markets do not always achieve allocative efficeincy.
what is the definition of market market?
When there is a mis-allocation of resources
what are the 2 types of externalities we need to know for the spec?
Negative externalities in production.
Positive externalities in consumption
what is the demand curve equivalent to?
Marginal Private Benefit.
what does marginal mean?
Extra units- this tells us that the benefit we derive from consuming a good falls with successive units of consumption.
What is the supply curve equivalent to?
The marginal private cost curve.
- because as we consume successive units of good or service, the opportunity cost of consuming that good increases.
the free market equilibrium on a diagram:
what is an externality?
The production or consumption of a good that causes costs or benefits to individuals outside of the market transaction (third party).
what are social benefits?
private benefits + external benefits = social benefits.
The benefits to society are greater than benefits to the individual.
what are social marginal costs?
social marginal costs = private costs + external costs.
what are social marginal benefits?
social marginal benefit = private benefits + external benefits
what are private costs for the production of flights for the airline?
Fuel.
Staff.
Maintenance.
Aircraft.
what are external costs generated by the production of flights?
Pollution.
Global warming.
Why does the market fail in production of flights?
The marginal social costs are greater than the marginal private costs.
MSC>MPC.
negative externality diagram:
Explanation and evaluation of negative externalities in production:
With negative externalities, the social costs are greater than private costs. The external costs are not accounted for by the price mechanism. The third parties have no way of charging for the external costs. The free market level of output shown by Q1 exceeds the socially optimum level of output (Q2). Therefore, every unit produced between Q1 and Q2 results in market failure because for every unit, social costs are greater than private costs. The extent of market failure is shown by the deadweight welfare loss.
Eval:
- Ignores the positive externality such as happiness and relaxation.
- Some externalities cant be measured.
what are the private benefits of education to individuals?
- High paying job.
- Skills / human capital.
- Status.
- Less risk of getting stuck in poverty.
What are the external benefits of an individual consuming education?
- Firms have more supply of labour in the long run.
- Government gets more taxes in the long run.
- Less crime.
- Less unemployment.
what are merit goods?
Any good that generates a positive externality in consumption - something good for you.
why does the market fail in consumption of education?
people who can’t afford school, can’t go to it.
diagram for positive externality in consumption:
explanation and evaluation of positive externality in consumption:
The marginal social benefits are greater than marginal private benefits. The external benefits are not accounted for by the price mechanism. This is because individuals only consider private benefits and private costs. Q1 shows the free market level of output, this is the level of output which would be generated if there was no government intervention. Q2 shows the socially optimum level of output. This difference between Q1 and Q2 shows market failure (misallocation of resources). THis is because for every unit between Q1 and Q2, the social benefit is greater than private benefit. The extent of market failure is shown by the deadweight welfare loss.
Eval:
- There is an opportunity cost in expenditure, as the money cant be spent elsewhere.
- Externalities are often subjective judgements made by the politicians.
