micro 18 - externalities

Question 1

why do government intervene in markets?

Answer 1

Markets do not always achieve allocative efficeincy.

Question 2

what is the definition of market market?

Answer 2

When there is a mis-allocation of resources

Question 3

what are the 2 types of externalities we need to know for the spec?

Answer 3

Negative externalities in production.
Positive externalities in consumption

Question 4

what is the demand curve equivalent to?

Answer 4

Marginal Private Benefit.

Question 5

what does marginal mean?

Answer 5

Extra units- this tells us that the benefit we derive from consuming a good falls with successive units of consumption.

Question 6

What is the supply curve equivalent to?

Answer 6

The marginal private cost curve.
- because as we consume successive units of good or service, the opportunity cost of consuming that good increases.

Question 7

the free market equilibrium on a diagram:

Answer 7

Question 8

what is an externality?

Answer 8

The production or consumption of a good that causes costs or benefits to individuals outside of the market transaction (third party).

Question 9

what are social benefits?

Answer 9

private benefits + external benefits = social benefits.

The benefits to society are greater than benefits to the individual.

Question 10

what are social marginal costs?

Answer 10

social marginal costs = private costs + external costs.

Question 11

what are social marginal benefits?

Answer 11

social marginal benefit = private benefits + external benefits

Question 12

what are private costs for the production of flights for the airline?

Answer 12

Fuel.
Staff.
Maintenance.
Aircraft.

Question 13

what are external costs generated by the production of flights?

Answer 13

Pollution.
Global warming.

Question 14

Why does the market fail in production of flights?

Answer 14

The marginal social costs are greater than the marginal private costs.
MSC>MPC.

Question 15

negative externality diagram:

Answer 15

Question 16

Explanation and evaluation of negative externalities in production:

Answer 16

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.

Question 17

what are the private benefits of education to individuals?

Answer 17

• High paying job.
• Skills / human capital.
• Status.
• Less risk of getting stuck in poverty.

Question 18

What are the external benefits of an individual consuming education?

Answer 18

• Firms have more supply of labour in the long run.
• Government gets more taxes in the long run.
• Less crime.
• Less unemployment.

Question 19

what are merit goods?

Answer 19

Any good that generates a positive externality in consumption - something good for you.

Question 20

why does the market fail in consumption of education?

Answer 20

people who can’t afford school, can’t go to it.

Question 21

diagram for positive externality in consumption:

Answer 21

Question 22

explanation and evaluation of positive externality in consumption:

Answer 22

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.