Negative Externalities

Question 1

What is price mechanism

Answer 1

The way price changes in response to changes in demand or supply

Question 2

What is a negative externality

Answer 2

Negative externalities are costs which affect third parties outside the price mechanism.

Question 3

Negative consumption externalities examples

Answer 3

Alcohol, cigarettes, fossil fuel cars

Question 4

Negative production externalities example

Answer 4

Noise from Construction, vehicles used to transport materials could block roads, fossil fuels to power their machines

Question 5

Within the price mechanism there are…

Answer 5

Private costs and private benefits

Question 6

Outside the price mechanism there are…

Answer 6

External costs and external benefits

Question 7

What are external costs

Answer 7

Costs that affect third parties who are outside the price mechanism

Question 8

What is the supply curve equal to?

Answer 8

Marginal cost curve
Inside the price mechanism it will be MPC

Question 9

What is the demand curve equal to?

Answer 9

Marginal benefit curve
Inside the price mechanism it will equal to MPB

Question 10

What is social cost?

Answer 10

Social cost = private cost + external cost

Question 11

What is social benefit

Answer 11

Social benefit= external benefit + private benefit

Question 12

When will MPB=MSB

Answer 12

When there is no external benefit

Question 13

What is welfare

Answer 13

Welfare = social benefit- social cost

Question 14

When does society gain welfare?

Answer 14

When MSB=MSC, also known as the social equilibrium.

Question 15

What causes welfare loss

Answer 15

When too many units are produced

Question 16

What happens when producers and consumers don’t consider the external costs of their actions?

Answer 16

They end up overproducing or over-consuming, which will result in welfare lost

Question 17

How can the government prevent welfare lost?

Answer 17

They can intervene with indirect taxes which is a tax on goods and services

Question 18

Where does the government want producers to produce?

Answer 18

They want them to produce at Qs at the socially efficient equilibrium where MSC=MSB

Question 19

In a free market producers produce at…

Answer 19

Qm market equilibrium where MpC=MPB

Question 20

What will happen if government introduces indirect tax?

Answer 20

Production will decrease as it will be more costly

Question 21

What are the government intervention used to fix negative externalities?

Answer 21

1)indirect Tax
2)pollution permits
3)minimum price
4)regulation

Question 22

What is the purpose of the cap and trade system?

Answer 22

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 .

Question 23

What will happen if the government sets a cap at 0?

Answer 23

No pollution will be emitted, leading to factories shutting down and job losses

Question 24

Are pollution permits tradable?

Answer 24

Yes, companies can sell each other their pollution permits, such as bigger firms selling them to smaller firms

Question 25

What is minimum price?

Answer 25

The lowest price suppliers of a good can sell for.

Question 26

What is the firearms act and when was it introduced?

Answer 26

Made it illegal to buy guns
Government introduced this in 1997
An example of regulation

Question 27

Examples of minimum price

Answer 27

2018 Scotland applied a 50p per unit of alcohol which increased the price of alcohol.
In September 2024 it will be increase to 65p

Question 28

EV of minimum price

Answer 28

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

Question 29

EV of tax

Answer 29

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