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
