Negative Externalities

Question 1

Market Failure

Answer 1

Failure of the market to allocate its resources effectively

Question 2

Overallocation

Answer 2

Occurs when too many resources are allocated to the production of a good relative to what is socially desirable, resulting in its overproduction

Question 3

Underallocation

Answer 3

Occurs when too few resources are allocated to the production of a good relative to what is socially more desirable

Question 4

Different views of market failure

Answer 4

Externalities
Lack of public good
Common access resources and threat to sustainability

Question 5

Externality

Answer 5

Cost or benefit to society that arises from production or consumption and falls on a third party

Question 6

Negative externality of production

Answer 6

A negative externality cause by production activities, leading to a situation where marginal social costs are greater than marginal private costs

Question 7

Examples of NEOP

Answer 7

• Congestion
• Pollution
  Air-Water-Land
• Carbon emissions

Question 8

Solutions to fix NEOP

Answer 8

Government regulations
Market based policies
Tradable permits (Cap and Trade)

Question 9

Advantages of Market based taxes/permits

Answer 9

• Internalize costs

- Both incentives producers to find cleaner technologies

Question 10

Disadvantages of Market Based taxes/permits

Answer 10

Practicality:
Figuring out logistics - which pollutants are harmful? How do we put a price on harm? Which production methods produce pollutants?

Question 11

Advantages of Government Regulations

Answer 11

• Much simpler

- Easier to implement

Question 12

Disadvantages of Government Regulations

Answer 12

• Externality is not absorbed by producer

- No market-based incentives, therefore can’t reduce size of externality