Negative externalities Flashcards
What are externalities?
externalities are spill-over effects from production and/or consumption for which no appropriate compensation is paid or received
How do externalities cause market failure?
if the price mechanism does not take account of the social costs and benefits of production and consumption
What are private costs?
the costs faced by the producer or consumer directly involved in a transaction
What are private benefits?
benefits for producer and/or consumer directly involved in an economic transaction
What is social cost and what curve does it affect?
Private cost + External cost
Affects supply curve
What is social benefit and what curve does it affect?
Private benefit + External Benefit
Affects demand curve
Examples of negative production externalities:
pollution
fishing
pesticides
noise pollution (airports)
Examples of negative consumption externalities:
fly-tipping
passive smoking
alcohol
noise pollution (concerts)
How do economists attempt to value externalities?
Shadow pricing
Compensation
Revealed preference
Possible government solutions to negative externalities:
Taxation of good or service- creates revenue but
depends on elasticity
Subsidising alternatives- reduces price of alternative for all
but expensive opportunity cost for gov
Tradable rights to pollute- uses market forces efficiently
but difficult to set permits at correct level
Regulation such min price laws- uses market forces
efficiently but difficult to set price at
appropriate price level
Legislation: laws banning or limiting amounts- effective but
over regulation (gov controlling)
negative externality in production graph
MPB=MSB- demand curve
MPC below MSC- supply curve
negative externality in consumption
MSC=MPC- supply curve
MPB above MSB- demand curve
subsidy graph- and where is consumer/ producer benefit
subsidy shifts outwards- supply
producer benefit on top
consumer benefit on top
taxation graph
S+tax to the left of the supply curve
