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
What is minimum price?
The lowest price suppliers of a good can sell for.
What is the firearms act and when was it introduced?
Made it illegal to buy guns
Government introduced this in 1997
An example of regulation
Examples of minimum price
2018 Scotland applied a 50p per unit of alcohol which increased the price of alcohol.
In September 2024 it will be increase to 65p
EV of minimum price
Regressive as it will take a higher proportion of those on low incomes less RDI, increasing income inequality
Look for alternatives on black market which may not be safe for digestion, strain on NHS
producers may not suffer if good is inelastic, revenue and profits increase
EV of tax
Demand of good may be inelastic so quantity may not change in the short run. But in the long run as tax revenue increase the gov can subsidise alternatives or provide information making the good more price elastic
Hard to estimate the correct amount of tax to internalise the externalities
Could lead to black market where these goods are not safe for consumption, causing strain on nhs.
E.g £27000 seized from off license shop selling vapes and cigarettes to
