Externalities L6

Question 1

Market Failure

Answer 1

Ineffective allocation of resources/when an externality is not internalised

Question 2

Pigouvian Taxes

Answer 2

Corrective taxes

Question 3

Negative Externality on Consumption

Answer 3

Government intervenes by imposing taxes to make the price higher and attempt to decrease demand
e.g. cigarettes and alcohol

Question 4

Positive Externality on Consumption

Answer 4

Government intervenes by providing subsidies
e.g. vaccinations and education

Question 5

Negative Externalities on Production

Answer 5

Governments intervene by:
1. imposing taxes (Pigovian Taxes)
2. implementing taxable pollution permits (Cap-and-Trade Policies)
3. Regulations and Laws
4. Subsidising cleaner alternatives
e.g. pollution

Question 6

Positive Externalities on Production

Answer 6

Government intervenes by providing subsidies to encourage production or consumption
e.g. Public infrastructure

Question 7

Coase Theorem

Answer 7

If private parties can bargain without cost over resource allocation, no government intervention is necessary
- dependent on who owns the legal right

Question 8

Issue of Private Solns

Answer 8

1. Transactions costs can make the price of bargaining too high and unfeasible
2. Large no. of people make it harder to reach an common agreement/decision

Question 9

Public Policies

Answer 9

1.Command and Control Policies: limits, standards or requirements e.g. govt. rules that smoking is forbidden in certain places
2. Market-Based Policies:
i) Pigovian Taxes
ii) Tradeable Permits: Cap-and-Trade Policies (pollution permits)