Model answers and exam technique

Question 1

repeatable

What is the starting point for building chains of analysis after you have brought in a negative externality?

Answer 1

….impact is not reflected in the market prices as those who suffer negtive externalities have no way of using the market to gain compensation

Question 2

repeatable

What is the starting point for building chains of analysis after you have brought in a positive externality?

Answer 2

Those who generate third party benefits have no way of using the market to charge for doing so

Question 3

What skills are required for answering 9 markers

Answer 3

Knowledge, analysis and application

Question 4

What is the general structure for 9/15 markers?

Answer 4

1. Definition
2. Diagram
3. Examples
4. Depth of analysis/chains of reasoning

Question 5

How do we phrase the idea that externalities cannot be easily valued?

Answer 5

The policy is not without its problems, chiefly that externalities are difficult to value and there is an information problem so that the government does not know exactly at what level to set the unit tax.

Question 6

How would we phrase the idea that it is **problematic **for a country to set environmental policy in isolation?

Answer 6

It is problematic if the government in any one country sets environmental taxes in isolation. This is because if *costs of production for firms *in any one country rise, this may produce the **unintended consequence **of incentivising them to relocate to other countries where [WHATEVER THEY PRODUCE] are not taxed and they can produce waste more freely.

Question 7

If we are to start an analysis about market failure, we ought to describe what we mean by a market functioning normally. How can this be done?

Answer 7

When a market economy is working well, scarce resources are allocated efficiently, being employed where they generate the most utility.

Question 8

What is the default literary economic example to dash in when talking about self-interest?

Answer 8

…In the words of Adam Smith “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.”

Question 9

what is a good literary economic example to dash in when talking about asymmetric information?

Answer 9

…famed case of Akerlof’s lemons deals with the situation of asymmetric information, where the seller of a second hand car has better info about its characteristics than the buyer. If a good 2nd hand car (peach) is worth 10000 and a poor one (lemon) is worth 5000 and 50% of 2nd hand cars fall into each category, the expected value of a 2nd hand car is 7500. Owners of a peach hence have reason not to offer their car for sale since they won’t acheive full value for them. Overtime, there will be mroe lemons in the market.