policies to address negative externalities (micro)

Question 1

What are the 3 key problems that result in negative externalities and market failure

Answer 1

Economic agents operate in their own self-interest

The market fails to price externalities properly

Misallocation of resources from social perspective

Question 2

Where do you find negative externalities?

Answer 2

Everywhere

Question 3

What does the government aim to do with these negative externalities

Answer 3

The aim of government policies is to move towards a socially optimal equilibrium and not to eliminate them.

Question 4

What does the government aim to do with these negative externalities

Answer 4

The aim of government policies is to move towards a socially optimal equilibrium and not to eliminate them.

Question 5

What do governments risk when intervening in a market?

Answer 5

Risk of government failure

Question 6

What 8 government interventions can be used for production and consumption externalities?

Answer 6

Carbon taxes & Other pigouvian taxes

Tradable pollution permits (market mechanism)

Carbon Border Tax

Subsidies/tax relief for clean energy investment

Tougher regulations on emissions

Minimum recycling targets

Nationalisation

Behavioural nudges

Question 7

What 5 things to take into account when saying whether tax intervention is effective in achieving aims?

Answer 7

Consider likely coefficient of price elasticity of demand (PED)

Consider likely coefficient of cross elasticity of demand (XED)

Consider likely coefficient of price elasticity of supply (PES)

Has the intervention changed relative prices sufficiently to trigger a change in the behaviour of agents affected?

If the policy is deemed to be ineffective are there better alternatives?