Negative Production and Consumption Externalities Flashcards
When do negative externalities occur?
When production and/or consumption impose external costs outside of the market for which no appropriate compensation is paid.
What is market failure?
When the market fails to allocate resources efficiently, allocates too many or too few.
What are some examples of negative externalities?
Air Pollution from factories
Damage to the environment from industrial ocean fishing
What does MPC stand for?
Marginal Private Cost
What does MPC mean?
The cost of producing one more unit.
What does MPB stand for?
Marginal Private Benefit
What does MPB mean?
The benefit of consuming one more unit.
What does MSB stand for?
Marginal Social Benefit
What does MSB mean?
Benefit to society of consuming one extra unit.
What does the market do with external costs?
Does not take into account external costs.
What is planned de-growth?
Scaling down consumption in countries.
What is a external cost?
cost that is associated with an individuals production or other economic activities, not reflected in market prices.
What is a social cost?
Private Costs + External Cost
What is the link between pollution tax and marginal private costs?
Pollution tax increases the marginal private leading to a fall in demand.
What are some advantages of pollution taxes?
Internalizes the externality and therefore makes the polluter pay.
Utilizes the price mechanism to change incentives and choices.
Raise tax revenue which can then be used to address other market failures.
