Externalities Flashcards
(55 cards)
When is it efficient for the individual?
When marginal private cost equals marginal private benefit
What is an externality?
A cost or benefit that one imposes on an unintended 3rd party
When is it efficient for society?
When marginal societal benefit equals marginal societal cost
What are the two kinds of externalities?
Negative externalities (external cost) Positive externalities?
Where do externalities come from? Consumption or production?
Both
What is the private cost of production of a car? (for producer)
Summation of wages, rent, interest and profit
What is the societal cost of production of a car?
Summation of wages, rent, interest and profit AND pollution
So with negative externalities of production, is more or less produced than would benefit society?
More because producers want to reach producers equilibrium and create maximum profit, they aren’t concerned with society. If it were up to society as a whole less would be produced.
Where is the market failure with negative externalities of production?
MSB > MSC so overproduction which leads to market failure. The government needs to intervene.
What are the governments solutions to negative externalities of production?
- Tax
- Government regulation/ban
- Tradable Permit Market
How would a tax work to decrease negative externalities of production?
For this to work the tax would need to be equal to the external cost to society because a tax adds to marginal private cost.
Problems of a tax to decrease negative externalities of production?
- External cost is very hard to measure.
- It also depends on externalities, the producer could push the tax on the consumer if the good was very demand inelastic.
- Taxes also lead to job loss and black markets
What are the problems with govt. regulation or banning to decrease negative externalities of production?
- Job loss
- Smuggling
- Production will move somewhere else
- If you ban something you lose the benefit it gives to society
- Black market
What are the positives and negatives with tradable permit markets to decrease negative externalities of production?
• Good for national and international
• Government can decide how much pollution is acceptable
BUT
• hard to measure
• could hurt the economy or pollute too much, hard to get a balance
• difficult to enforce
Examples of positive externalities of production?
Healthcare, Education, infrastructure
Is marginal social cost or marginal private cost bigger with positive externalities of production?
Marginal private cost is bigger than marginal social cost
What does this disparity in positive externalities of production lead to?
Underproduction because the producers produce at a point where MPC is equal to MPB but society should produce where MSC = MSB which is at a higher production rate. For example with education society would be better off if producers provided more education but it is expensive for them so they stop at a certain point.
What does the triangle on the graph showing positive externalities of production show?
Potential gain to society
If you move to QE you will gain this
Government solutions to positive externalities of production?
- Subsidies
2. Offer something for free if it has a positive externality (e.g. education)
Downside of subsidies as a solution to positive externalities of production?
- The subsidy needs to equal the positive externality but this is difficult to measure
- Costly
- opp cost, money could be spent somewhere else
Downside of offering things with positive externalities for free as a solution to positive externalities of production?
Costly, puts a burden on tax payers
Examples of a negative externality of consumption?
Cigarettes with the externality being second hand smoke and healthcare (if universal)
With negative externalities of consumption, at QE is MPC or MSC greater?
MSC = MPC
With negative externalities of consumption, at QE is MPB or MSB greater?
MPB > MSB
