negative externalities

Question 1

why does government tax

Answer 1

makes it more expensive for consumers to buy and producers to sell

discourages use of these goods

protects society from harmful 3rd party effects

Question 2

negative externalities meaning

Answer 2

costs affecting 3rd parties outside the price mechanism

Question 3

negative consumption externalities

Answer 3

costs affecting 3rd parties as a result of the consumption of the good

Question 4

negativ production externalities

Answer 4

producers creating the negative externalities

Question 5

private costs in npe

Answer 5

what is costs producers to produce the goods e.g. material
inside price mechanism

Question 6

private benefits

Answer 6

consumers receiving private benefits in price mechanism from purchasing

Question 7

external costs

Answer 7

also known as negative production externalities, felt outside price mechanism

Question 8

what is supply curve

Answer 8

marginal cost curve, tells us lowest price a producer would be willing to sell a good for

Question 9

demand curve

Answer 9

marginal benefit curve

Question 10

marginal private cost

Answer 10

private costs to producer in price mechanism

Question 11

marginal private benefit

Answer 11

benefit from demanding the product they want, inside price mechanism

Question 12

vertical axis

Answer 12

costs and benefits

Question 13

what does government worry about

Answer 13

society’s costs and social benefits

Question 14

social costs

Answer 14

private + external costs

Question 15

social benefit

Answer 15

private + external benefits

Question 16

size between msc and mpc shows

Answer 16

the external costs to society thus vertically above initially mpc curve

Question 17

net benefit

Answer 17

social benefit - social cost which is welfare

Question 18

socially efficient equilibrium

Answer 18

best for society, where msc meets msb /mpb

Question 19

welfare losss

Answer 19

overproducing has more social costs affecting 3rd parties, prpoducers only produce with private costs and benefits in mind

overproduction between socially efficient (msc=msb )quantity and market equilibrium (mpb=mpc)

Question 20

for alternative npe diagrams why does distance increase

Answer 20

distance increases each time= external costs increase each time

producing more produces more external costs. overproduction between socially efficient quantity and market quantity

welfare loss bc too many units produced

Question 21

negative consumption externalities

Answer 21

no diagram

Question 22

correcting welfare loss- how to internalise negative production externality

Answer 22

with indirect tax like specific snd ad valorem

introducing tax makes production more costly for the firm

increases marignal private cost for production

mpc shifts to mpc + tax so mpc interests with mpb
moves it from quantity qm to socially efficient quantity qs

no longer overproduces because tax prevents them from overproducing too much#

to internalise overproduction and eliminate negative production externality

Question 23

evaluation of tax for welfare loss

Answer 23

only works if government puts on correct size tax

if too little it wont correct welfare loss
-has to set it to external cost between mpc and msc

Question 24

size of tax must be equal to

Answer 24

external cost at socially efficient quantity

Question 25

trade pollution permit- cap and trade

Answer 25

CAP AND TRADE

introduced by eu in 2005
to reduce carbon emissions across europe
to help global warming

cap is governments limit on how much it will allows firms to pollute for a year

2bn of tonnes of carbon each year(which they see as socially efficient)

Question 26

trade pollution permits to firms

Answer 26

1 permit allows 1 tonne of carbon

2 billion permits to give to firms (may vary on size of firm)

until 10% of permits left, government auctions to give them out, firms then buy them at the auction, gives government moeny
- money from auctions can be used to subsidise eco-friendly firms for renewable energy

Question 27

trade pollution permits are tradeable

Answer 27

buy pollution permits from other factors if too expensive

(factories can sell permits to reducepollution even more)
(a produces less while b produces slightly more)
keeps it under the cap in the most efficient way

firms that have lowest costs to reduce their pollution are given incentive to reduce pollution levels the most
- sell of permits to other firms for a profit (other firms who may find it more costly )

Question 28

how does cap and trade system work

Answer 28

government sets a cap on how much pollution it will allow each year
(this is estimated to be socially efficient level of pollution- it then divides up its permits between firms until the cap is reached)

Question 29

firms producing ..

Answer 29

more goods receive a higher permit

less goods receive a lower permit

Question 30

firms finding it cheaper to reduce their pollution can

Answer 30

buy permits from firms finding it cheaper to reduce their pollution

Question 31

minimum price

Answer 31

lowest price suppliers of a good can sell for
e.g. scotland- 1 unit of alcohol is 50p, help to reduce violence and dirnk drinking incidents

this way they keep price of alcohol high as they legally cannot go below, also leads to a contraction in demand

Question 32

what does setting price at pmin do

Answer 32

sets it above price equilibrium which is cannot go below, means excess supply/ surplus

pmin reduces quantity demanded through rationing

quantity demanded has fallen, this helps reduce overconsumption

prevents price from falling back to equilibrium

Question 33

regulation

Answer 33

explanation- e.g. of gov regulation: government requires cigarette making companies ‘smoking kills’ ,illegal to smoke in closed public places, ban cigarette adverts from tv

alcohol only allowed to be bought at 18

cars- negative production externalitites, cars have to meet certain environmental requiremnets to be legally sold
factories have to meet environmental standards to operate or gov regulators will shut them down

-making changes to the law to address market failure

-ban goods completely
-set environmental standards
-set legal age restrictions

Question 34

Socially efficient equilibrium

Answer 34

Where MSC = MSB and society’s welfare is maximised.

Question 35

radable pollution permits

Answer 35

Permits which allow firms to pollute up to a certain limit. These permits can then be traded between firms.

E.g. Europe’s Emissions Trading Scheme (ETS). The EU government set a cap of 2bn tonnes of CO2, and issued permits to firms. It held the last 10% of permits back for auction.

Question 36

minimum price

Answer 36

The lowest price a good can be legally sold for.

E.g. Scotland’s minimum price on alcohol is 50p per unit of alcohol.

Note: a minimum price must be set above the market price otherwise it will have no effect.

Question 37

Regulation

Answer 37

When the government makes changes to the law to address market failure.

E.g. the Firearms Act which made it illegal to buy a handgun in the UK.

Question 38

Negative consumption externalities (or external costs of consumption)

Answer 38

When the consumption of a good creates costs to third parties outside the price mechanism.

E.g. consuming cigarettes will damage the health of others via passive smoking.

Question 39

Negative production externalities (or external costs of production)

Answer 39

When the production of a good creates costs to third parties outside the price mechanism.

E.g. a factory producing nuclear bombs will pollute nearby rivers with radiation.

Question 40

Negative production externality diagram

Answer 40

MSC is above MPC because we have to add on the external costs.

Note: this diagram is only for negative production externalities – do not use it when discussing negative consumption externalities

Question 41

Tax to internalise a negative production externality

Answer 41

To correct a negative production externality, a tax must be set = the size of the external cost between MSC and MPC at Qs.

Question 42

evaluation- oqt

Answer 42

quantifying: there is missing info, value judgements, difficult to quantify: cannot be accurately measured

opposite outcomes

time- are they temporary
long run or short run
effects can also be mitigated