Negative Externalities Flashcards
What is price mechanism
The way price changes in response to changes in demand or supply
What is a negative externality
Negative externalities are costs which affect third parties outside the price mechanism.
Negative consumption externalities examples
Alcohol, cigarettes, fossil fuel cars
Negative production externalities example
Noise from Construction, vehicles used to transport materials could block roads, fossil fuels to power their machines
Within the price mechanism there are…
Private costs and private benefits
Outside the price mechanism there are…
External costs and external benefits
What are external costs
Costs that affect third parties who are outside the price mechanism
What is the supply curve equal to?
Marginal cost curve
Inside the price mechanism it will be MPC
What is the demand curve equal to?
Marginal benefit curve
Inside the price mechanism it will equal to MPB
What is social cost?
Social cost = private cost + external cost
What is social benefit
Social benefit= external benefit + private benefit
When will MPB=MSB
When there is no external benefit
What is welfare
Welfare = social benefit- social cost
When does society gain welfare?
When MSB=MSC, also known as the social equilibrium.
What causes welfare loss
When too many units are produced
What happens when producers and consumers don’t consider the external costs of their actions?
They end up overproducing or over-consuming, which will result in welfare lost
How can the government prevent welfare lost?
They can intervene with indirect taxes which is a tax on goods and services
Where does the government want producers to produce?
They want them to produce at Qs at the socially efficient equilibrium where MSC=MSB
In a free market producers produce at…
Qm market equilibrium where MpC=MPB
What will happen if government introduces indirect tax?
Production will decrease as it will be more costly
What are the government intervention used to fix negative externalities?
1)indirect Tax
2)pollution permits
3)minimum price
4)regulation
What is the purpose of the cap and trade system?
To reduce carbon emissions to slow down global warming.
The government first sets a cap( how much pollution is allowed to be emitted each year) and then gives out pollution permits to firms. Once they have 10% of the pollution permit left they set them up for auction, increasing government revenue .
What will happen if the government sets a cap at 0?
No pollution will be emitted, leading to factories shutting down and job losses
Are pollution permits tradable?
Yes, companies can sell each other their pollution permits, such as bigger firms selling them to smaller firms
