Week 5- Government Intervention to Correct Market Failure Flashcards
draw: socially efficient level of environmental quality (MAC+MDF)
- Marginal abatement cost curve (downward sloping). continues to zero and high pollution because there is so many damages that the site is better left degraded
- Marginal damages curve (upward sloping). e.g sediment pollution in river from logging makes it unsafe to swim in and biodiversity decreases.
Draw: Social costs when pollution is greater than optimal
- deadweight loss on right hand side of graph
- costs society more in form of environmental degradation than benefits of greater pollution (production).
Draw: Social costs when pollution is lower than optimal
- costs society more to clean up then the benefits of lower pollution.
- deadweight loss on left
Draw: optimal level of pollution with technological innovation
- MAC (abatement cost) curve lowered.
- new level of optimal pollution as it costs less for society to clean up or less damages from production
Pigouvian approach to market failure
- use taxes to remove divergence between MSC and MPC, and MSB and MPB
Pigouvian tax on timber production (negative externality)
- increase MPC of production to where MSC intersects MSB curve with tax
- tax to remove deadweight loss from over harvesting
Pigouvian approach on positive externalities
subsides
Problem with pigouvian approach of levying taxes on production of timber when externality is water quality
doesn’t encourage development of technology that minimises impacts on water quality
solution to pigouvian tax problem
- externality should be taxed (e.g sediment levels in water, not volume of timber harvested
public good eg
air, national defence, knowledge
why market failure for public goods
private market will not supply the good since no one would pay for it because they cannot be excluded from benefits (“free rider”)
externalities associated with public goods are…
positive
the social value of public goods are substantially greater than the private value because
because benefits are non-rivalrous and non-excludable
free market quntity of public good is ___ than sociall efficient quantity
less… because private producers cannot avoid free riders.
socially efficient price
MSB=MSC