NEGATIVE EXTERNALITIES IN PRODUCTION AND CONSUMPTION Flashcards
What are negative externalities in production
costs to 3rd parties as a result of actions of producers
IN NEGATIVE EXTERNALITIES of production , producers are producing somehing and 3rd parties are
suffering the costg
what is a 3rd party - production terms
economic agents that have nothing ot do with the activity/transaction taking place but suffering costs as a rsult of production
give 4 examples for where 3rd parties suffer as a result of production
Air Pollution
Resource Depletion
give 4 examples for where 3rd parties suffer as a result of production
Air Pollution
Resource Depletion
Resource Degradation
Deforestation
explain how air pollution is a negative externality and affects 3rd parties
thorugh producing metals , textiles and chemicals
air pollution is a by product
local residents are the 3rd party suffering from respiratory probles + a greater risk of cancer
explain how resource depletion effects 3rd parties
future gen suffer from a loss of income and not being able to consume goods and services that may have been made from those reosurces
what is resource depletion
consumption of a resource faster than it can be replenished
explain how deforestation effects a 3rd party
3rd party villagers living near and use forest for food/water sources suffer from a greater risk of flooding
in terms of a negative externality What is greater MSC and MPC
msc > mpc
explain why in a negative externality of production msc greater than mpc
SC= PC + EC
we have external costs as a result of production - they become real
EC are +Ve meaning SC are greater and higher than PC
since were working with negative externalitirs in production what curve moves
cost/supply
how would you draw graph for negatove externalities in producgtion
y axis = price /costs/benfits
x axis = quantity
draw MPC then draw MSC behind / higher as theyre greater
then draw D=MPB=MSC curve
draw equilibrium at mpc = mpb demand and mpc w p & q
draw another equilibrium at social optimum (mpb = msc) w pq
shade in triangle towards social optimum ( diff between social cost and benefit)
why does the marekt allocate reosurces at mpb = mpc - production ?
because thats the private optimum
where is the allocativley efficient and social optimum
MSC = MSB
why is the market allocating resources at the wrong level / why is ther a misallocation of scarce resources
theres a difference between SC & PC
why is the market allocating resources at the wrong level / why is ther a misallocation of scarce resources in production
theres a difference between SC & PC
why do we have a welfare loss in -ve x of production
there’s an overproduction and overproduction
if we’re not maxing net social benefit what is not occuring
allocative efficiency is not occuring here
why is net social beenfit not occuring reference to Q*
all units produced beyond q* have a greater cost than sb
ANALYSIS -VE EXTERNALITY GRAPH -
self interest
fimrs ignore the full social cost due to self interest , tehy only consider private costs
as a result the marekt allocates scarce resources @p1 and q1 the private optmum instead of the social optimum of q*
the result is overproduction and overconsumption shown by Q* to q1
analysis of -ve externality graph
price (too low)
price is too low @p1 as oppoed to p*
p1 only accounts for PC and not teh full sc which includes EC
making the whole problem worse as as it encourages more consumption of goods( inverse law of demand means lower price more people able and willing to buy )
fuelling overproduction and overconsumption making the issue of -ve externalities worse
end result is a misallocation of scarce resources and allocative inefficiency - culinating the welfare loss
what is a negatove externality in consumption
costs to 3rd parties as a result of actions of consumers
give 3 examples of negatove externalities in consumption
smoking
excessive alchool
excessive sugary drinks and fast food
expain who smoking is a negatove externality of consumption
makes a cost to 3rd party bystanders who inhale passive smoke
whihc increases their risk of suffering from long cancer /respiratry problems
explain why excessive alchoohol is a negative externality in consumption
the 3rd party are the public and health servidces that have to dela w treating them/crimes that are a result of their drunk action
explain why excessive sugary drink /fast food consumption is a -ve externality
significant cost of 3rd party health service
3rd party impact on employers as got to suffer the cost of lost productivyt/dasy missed for work
which curve do we move in -ve ex of consumption
benefits (demand curve
explain what happens to the sb equatino and the whole msb malarky
eb are negatove as a reuslt of consumption making PB greater than SB
DRAW TEH GRAPH FOR NEGATOVE XTERNALITIES OF CONSUMPTION
y axis = price/costs/benefits
x axis = quantity
DRAW MSB LOWER THAN MPB
DRAW S=MPC=MSC upwards
two equilibriums - p* Q* at social optimum of msb = msc
other at p1 q1 where s = mpb
in -ve ex of consumption where foes the markets allocates carce reosurces
compared to where the society would
mkt allocates resources at the private optimum q1 p1
whereas society like resources to be allocated at social optimum msb = msc Q* and p*
why so there a misallocaiton of resources of in -ve ex of consumption
too much being produced at q1 so thers a over consumption and over production
allocative inefficiency =
welfare loss
allocative inefficney = welfare loss highlight this on the graph
triabgle pointing to social optimum
in -ve ex of consumption why is there a welfare loss
@q1 social costs are higher thna social benefiots
so all units produced beyonf q* are being produced @ a higher SC than SB - So we got a loss to society
analysis of -ve externalities of consumption grpah
consumers ignore full SB of actions only, considering PB due to self interst and the endresult is mkt allocaitng scarce reosurces @q1 and P1 - private optimum where
mpc and mpb cut leading to an overconsumption and overprocution of g
as a result theres a misallocation of resources - toomany resources are being alloated to this mkt - shown by overproduciton and consumption from q* to q1
than is socially desrible resulting in allocative inefficiency and a welfare loss to society
