Negative externality of production Flashcards
1
Q
-ve externality of production
A
- third-party cost
- not directly involved in production of gd or svc
- not compensated for damages
- e.g. release of industrial waste, decrease catch, decrease income of fishermen
2
Q
Marginal social cost (MSC)
A
- true cost to society
- result of pdtn of an additional unit of gd
- MSC = MPC + MEC
3
Q
Marginal private cost (MPC)
A
- cost firm incurs
- producing additional unit of output
- e.g. wages, rent, cost of raw material
4
Q
Marginal external cost (MEC)
A
- cost incurred by third-party
- not compensated
- frm additional unit of gd produced
5
Q
5 step analysis of problem
A
- Specify private cost and benefit, external cost (monetary terms)
- Divergence between MSC and MPC
- Explain mkt eqm output where MPB=MPC
- Explain social optimum lvl of output where MSB=MSC
- Compare pdtn lvl 0Qm and OQs, explain deadweight loss
6
Q
Gov policies to correct negative externalities of production
A
- Indirect (Pigouvian) taxes
- Carbon taxes
- TPP (tradable pollution permits)
- Legislation and regulation
7
Q
Indirect/Pigouvian tax
A
- levied on activities that generate -ve externalities
- correct inefficient mkt outcome
- economic agent pay for external cost he created
- gov could impose Pigouvian tax on pdtn that = MEC
8
Q
Effects of Pigouvian tax
A
- if tax calculated reflect MEC accurately the firm inflicts on 3rd party
- internalise ext cost
- ceteris paribus, resulting higher cost reduces ability to produce the same amt
- fall in Qs (socially optimal lvl of output), where MSC=MSB
- welfare loss frm overproduction eliminated
9
Q
Carbon Taxes
A
- imposed when fossil fuels are burned
- makes them pay for ext cost of carbon emissions
- aimed to eliminate negative externalities frm CO2 emissions
- force producer to pay full cost of production
10
Q
Example of carbon tax
A
- Britain (2016-2020)
- $24.93 per tonne
- carbon emissions fell by 55% in 5 yrs since implementation
11
Q
Evaluation of Pigouvian and carbon taxes (+ve)
A
- Allows market to continue operating
- forces firm to shoulder the full social cost of their actions
- consumer sovereignty protected, consumers willing and able to pay for higher px can still obtain gd - Producers encouraged to find cleaner ways of production
- incentive in LR to reduce pollution and save more taxes
12
Q
Evaluation of Pigouvian and carbon taxes (-ve)
A
- lack of knowledge
- damage frm pollution difficult to access
- gov might fail to tax right amt
- difficult to measure the severity of damage, current monetary cost amounts
- over/under estimation of external cost – over/under taxation
- less/more than social opt lvl output produced
- gov failure (fails to correct mkt failure efficiently)
13
Q
Tradable pollution permits
A
- some think that taxes distorts the way free mkt operates
- tradable/marketable pollution permits to reduce pollution – free mkt mechanism
- for it to be effective – common acceptance of legal framework for trading permits, regulation of amt of pollution produced
14
Q
Example of tradable pollution permit
A
- Kyoto Protocol (2012 -2020)
- mkt for emissions – Emissions Trading Scheme (ETS)
- each country accepted target for limiting/reducing emissions
- do not use up all the credits, can sell to others who exceeded
15
Q
Define tradable pollution permits
A
- rights to firms to buy or sell pollution
- in artificially created mkts
- allows them to create a fixed amt of pollution
- gov can control no. of pollution permits available – regulate total carbon emissions
16
Q
Evaluation of Tradable Pollution Permits (+ve)
A
- incentivizes producers to adopt cleaner technologies
- do not have to buy carbon credits
17
Q
Evaluation of tradable pollution permits (-ve)
A
- allow rich countries to avoid taking domestic action to reduce pollution
- high administrative costs
18
Q
Evaluation of TPP (Rich countries)
A
- avoid taking domestic action to reduce pollution
- pollution concentrated in certain areas
- e.g. Japan buy up TPP from Russia (plenty, industrial plants shut down during 1990 economic meltdown)
- idea of international TPP – controversial
19
Q
Evaluation of TPP (High administrative costs)
A
- monitoring pollution emissions
- many firms involved
- need strict system to verify and report emissions
- funding for poorer countries to develop new tech problem
- ensure commitment and compliance (rich countries), ie legally binding consequences
20
Q
Legislation and regulation
A
- laws used to prohibit/regulate pdtn behaviors
- strictly mandate producers’ behavior
- can be banned if no amount of output is acceptable/output needs to be reduced
- e.g. Sg Environmental Pollution Control Regulation (Air Impurities)
- sulphur content used in fuel by industries cannot exceed 1% by weight
- industries near urban areas need to use fuel w less sulphur
21
Q
Effect of legislation and regulation
A
- to meet standards firms have to spend more money
- increase MPC
- laws incentivize producers to choose diff pdtn methods
22
Q
Evaluation of legislation and regulation (+ve)
A
- clear and simple to understand
- easy to administer
- police can conduct spot checks
23
Q
Evaluation of legislation and regulation (-ve)
A
- No incentive to reduce pollution below required lvl
- Less competitive against foreign producers (increased regulation raises px)
- Administrative and enforcement cost – gov fail to correct mkt failure efficiently due to red tape and bureaucracy – slower decision-making, waste of scarce resources
- e.g. SG (2013 Perc report), 1st out of 12 Asian economies, least encumbered by bureaucracy – gov failure least likely in sg
24
Q
Education
A
- makes consumers turn away frm pdt
- lower firms’ sales
- forced to take consumers’ opinions into consideration
- change pdtn methods to reduce -ve externalities
25
Q
Evaluation of education (+ve)
A
- firms very influenced by consumers opinions
- want to keep them happy
- otherwise will continue losing sales (aim to max profits)
26
Q
Evaluation of education (-ve)
A
- small diff in solving -ve externalities problem and sustainability
- e.g. info abt oil spill affecting livelihood and health of local community (Hawaii Nov 2021 – Redhill Navy Fuel Facility) – tainted water
- concerned, boycott firm
- e.g. broader, general problems ie. burning fossil fuels that cause climate change – education not effective, need broader solns (ie. Pigouvian/carbon taxes)
- boycotting 1 firm – not very effective in mitigating problem
