ECON MICRO MARKET FAILURES (CH 5)

in the context of MSB and MSC, when is allocative efficiency met?

Allocative effi ciency is achieved when MSC = MSB. When there is no externality, the competitive free market leads to an outcome where MPC = MSC = MPB = MSB

Give some arguments in favour of cap and trade schemes instead of carbon taxes

Carbon taxes may be too low. Carbon taxes cannot target a particular level of carbon reduction Carbon taxes are regressive. Carbon taxes must be adjusted for inflation

where can externalities arise from?

Consumption activities Production activities that's why there are externalities that arise from production and consumption.

Direct government provision to correct positive externalities of production

For example, governments often engage in research and development (R&D) for new technology, for medicine and pharmaceuticals, and many other areas. they can also directly provide training for workers. Governments pay for such activities with government funds, raised through taxes. MPC CURVE SHIFTS DOWNWARDS towards the MSC (to the level of social opti)

provision of information to correct failure from asymmetric information

Governments may also respond by directly supplying information to consumers, or by forcing producers to provide information (disclosure), thus protecting consumers in their purchasing decisions.

what is the result that arises from asymmetric information?

In a free unregulated market, the result is usually to underallocate resources to the production of the good or service. Consumers are likely to be aware of possible dangers to themselves, and will be cautious about buying the good or service, resulting in a lower demand and less production. However, if consumers are unaware of possible hidden dangers, such as with unsafe food or toys, there could result an overallocation of resources to the production of these goods and services.

The demand curve is also a.... curve

MARGINAL BENEFIT CURVE

The Supply curve is also a.... curve

MARGINAL COST CURVE

If there are no externalities (no spillover effects on third parties)......MPC AND MPB ..

MPB and MPC determine a socially desirable level of equilibrium where allocative efficiency is met.

condition in which All negative externalities create external costs

MSC > MSB this is because the cost of consuming or producting each unit of output is greater than the benefit gained from teh activity or action.

describe the diagram for PEP's

MSC lies below the MPC the difference btw teh curves is equal to the external benefits D = MPB = MSB because the externality only involves production market equilibrium is where MPC = D the market underallocates resources to research and development activities that lead to new technologies, and not enough of them are undertaken

WHAT ARE MERIT GOODS

Merit goods are goods that are held to be desirable for consumers, but which are underprovided by the market. reasons for underprovision include: --> the good may have positive externalities (too little being provided by the market) --> low levels of income and poverty (people cant afford to buy goods that are merit such as HC services) --> consumer ignorance or information failure (they may be ignorant to the benefits that some goods provide such as preventive HC)

Legislation to correct PEC's

OBJECTIVE : promote greater consumption of goods with positive externalities. For example, many countries have legislation that makes education compulsory up to a certain age demand for education increases (it is a merit good) and so the MPB shifts opwards towards the MSB

What is privatization?

Privatisation is the opposite of nationalisation, as it involves a transfer of ownership away from the public and toward the private sector

What are quasi-public goods?

Public goods that are not "PURE" these are NON RIVALROUS, but are EXCLUDABLE for example, public museums that charge an entrance fee or tolls on the road. because consumers must pay to use them, they are excludable.

what is nationalization?

Refers to a transfer in ownership of a firm away from the private sector and toward government ownership. A nationalized firm is a government-owned firm. Government ownership of a monopoly is sometimes pursued as an alternative to government regulation of privately owned natural monopolies.

what has fueled the negative externality of production arising from fossil fuels

SUBSIDIES When environmentally damaging production activities are subsidised, they result in greater production, leading to greater environmental damage. THESE ARE POLICY FAILURES.

DIRECT GOV PROVISION AND SUBSIDIES TO CORRECT A PEP have the exacts same outcomes (TRUE/FALSE)

TRUE

Marginal benefit means

The benefit received by consumers of consuming one more unit of the good.

when drawing supply curves for externalities, the supply curve represents

The supply curve therefore represents marginal private costs MPC

what are some responses to moral hazard, evaluate them.

This is often done by making the buyer of insurance pay for part of the cost of damages (these payments are known as 'out-of-pocket payments'). A problem with out-of-pocket payments is that it has different effects depending on the income level of insurance buyers. Lower-income earners usually choose low-cost policies with high out-of-pocket payment because these are more affordable, while higher-income earners choose the opposite In the financial area, moral hazard is dealt with through government regulation of financial institutions, intended to oversee and prevent highly risky behaviour.

what is teh final outcome of a NCE, in terms of resource allocation?

When there is a negative consumption externality, the free market overallocates resources to the production of the good, and too much of it is produced relative to what is socially optimum. This is shown by Qm > Qopt and MSC > MSB at Qm.

typicall outcome for PEP in terms of allocation of resources

When there is a positive production externality, the free market underallocates resources to the production of the good: too few resources are allocated to its production, and too little of it is produced

All consumption externalities (+ or - ) create

a divergence between the PRIVATE AND SOCIAL benefits

Tradeable permits / cap-and-trade

a policy involving permits to pollute issued to fimrs by a government or an international body. These permits to pollute can be traded in a market and the price is determined by supply and demand.

what are PUBLIC GOODS

a private good is one that is RIVALROUS and NON-EXCLUDABLE NON-RIVALROUS (the consumption by one person DOES NOT reduce its availability from someone else) NON-EXCLUDABLE (it is not possible to exclude someone from using that good) These are also known as pure public goods (e.g a lighthouse or streetlights, flood control, police, fire protection, etc)

The problem of safety in the workplace and possible responses

a very unsafe working environment disrupts production Some employers may fi nd it in their interests to hide information from potential employees regarding unsafe working conditions, with negative consequences for the safety of the workers they employ. This represents market failure due to asymmetric information in the labour market.

what is the outcome of adverse selection?

adverse selection results in an underallocation of resources to health insurance services, as the insurance company reduces the supply of insurance to protect itself against having to provide insurance coverage to very high risks, or people who are more likely to become ill. Adverse selection also leads to high insurance costs for insurance buyers.

legislation to respond to monopoly power

anti-monopoly laws can be used to prevent the development of substantial monopoly power or the exercise of monopoly power legislation is often used to prevent collusion. to encourage competition between them, to break up monopolies or near-monopolies that have been found to engage in monopolistic practices into smaller units that will behave more competitively, to prevent mergers between fi rms that would result in too much monopoly power, and in general to encourage competitive behaviour in the economy.

Evaluating possible responses to adverse selection

direct gov provision of HC services at 0 cost A potential problem with government-funded or social health care systems involves difficulties in controlling costs of providing health care and growing burdens on the government or social health insurance budgets.

All production externalities ( + or - ) CREATE A

divergence between the private and social costs

what is pollution of affluence

environmental degradation as the by-product of production and consumption activities resulting from increasing quantities of output produced and consumed (economic growth) arises mainly from industrial production and high-income consumption patterns that involve the heavy use of fossil fuels

Define Market failure

failure of the market to achieve allocative efficiency resulting in the overallocation or underallocation of resources of it relative to what's most socially desirable.

WHat is the important question to make in relevance to economic and environmental sustainability?

how to strike a balance between environmental and economic goals, so that both can be satisfi ed into the future. The answer to this question is provided by the concept of sustainable development 'development that meets the needs of the present without compromising the ability of future generations to meet their own needs'

Trade liberalization to deal with natural monopolies

in involves the removal by the government of barriers to international trade, or the buying and selling of goods and services between different countries. . Trade liberalisation has the effect of increasing imports (goods purchased from other countries), and therefore increasing the competition faced by the domestic monopolistic firm, which does not have much domestic competition. as a result, the increase in competition reduces the firm's monopoly power.

what are "POLICY FAILURES"

involving the pursuit of a policy for one purpose that creates problems in another area (environmental destruction). Subsidies should therefore be studied for their environmental impacts, and changed or eliminated accordingly. INCONSISTENT WITH THE PURSUIT OF SUSTAINABLE DEVELOPMENT

DISADVANTAGES OF TAXES for NEP's

main difficulty is to design a tax or "carbon tax" equal to the in value to the amount of production. The following questions arise: --> What production methods pollute the most? --> which pollutants and harmful and give rise to the external costs? --> what is the value of the harm? plus there is always the risk that as they have the possibility to pay the tax and keep emitting, theres a risk that they do not reduce emissions.

describe teh diagram for a positive externality of CONSUMPTION

marginal social benefi t (MSB) curve lies above the marginal private benefi t (MPB) the optimum equilibrium is where MSB = S the free market UNDERallocates resources to the production of the good. and too little of it is produced relative to the social optimum

Evaluating LEGISLATION AND ADVERTISEMENT to correct positive production and consumption externalities

o similar limitations concerning calculating the size of external benefits For example, they can have very positive effects in certain cases (such as legislation requiring schooling up to a minimum age or advertising on the importance of good nutrition), but in other cases are ineffective (for example, they cannot on their own increase consumption of health care services and education to the optimum level) advertisement may work well in some cases but may not in some, it depend's on consumer's behaviour and reaction to them, they can always ignore. they have the further effect of raising the price of the good to consumers, which may make the good unaffordable for some consumer groups legislation and advertising sometimes can be used more effectively if they are implemented together with direct provision and subsidies. A good example is education, where compulsory schooling up to a certain age (legislation) goes together with direct government provision.

marginal private costs

refer to costs to producers of producing one more unit of a good

marginal social costs

refer to costs to society of producing one more unit of a good

Positive externalities of production

refer to external benefits created by producers. If, for example, a firm engages in research and development, and succeeds in developing a new technology that spreads throughout the economy, there are external benefits because not only the firm but also society benefits from widespread adoption of the new technology social costs of RnD are lower that the private costs

what are some other examples of NEC's

sugary drink consumption heating homes and driving cars (nec) partying with loud music very late and disturbing the neighbours

ADVANTAGES of taxes for NEP

taxes on emissions are superior to taxes on output. Taxes on output only provide incentives to producers to reduce the quantity of output produced with a given technology and given polluting resources, but not to reduce the amount of pollution they create or to switch to less polluting resources. Taxes on pollutants emitted provide incentives to fi rms to economise on the use of polluting resources (such as fossil fuels) and use production methods that pollute less. Firms do not all face the same costs of reducing pollution; for some, the costs of reducing pollution are lower than for others, and these will be the ones most likely to cut their pollution emissions to avoid paying the tax. Firms that face the highest costs of reducing pollution will be the ones least likely to cut their pollutants, and so will pay the tax. The result is that taxation leads to lower pollution levels at a lower overall cost

WHY DOES the tax to correct negative consumption externalities affect producers, shifting the supply curve upward?

these two shifts produce identical market outcomes. If instead a tax per unit bought is imposed on consumers, which they pay directly to the government, this would cause a downward shift of the demand curve

DISADVANTAGES OF tradeable permits for NEP's

they face all technical limitations that taxes face because you need to select a particular industry in one country, two or more that have similar production activities. You also hav eto determine the price at which you will set the permits for, and how will you distribute them initially (some programs have recently been auctioning their permits for the initial stage). Issues of political favouritism may come into play, as governments give preferential treatment to their 'friends' and supporters. also, they require constant regulation, and the government or another authority to set the cap at a specific level, which theoretically would reduce over time.

what is the government's aim to nationalize natural monopolies?

to ensure that prices are lower and output greater than would result from an unregulated monopoly

What is asymmetric information?

when one party in an economic transaction (either the buyer or the seller) possesses more information than the other party. example: Sellers of used cars have information about the car's quality that they are unlikely to reveal to potential buyers if the car has a defect. In a free and unregulated market, sellers of food could sell products that are unsafe for human consumption, possibly leading to illness and even death.

Subisidies to correct PEC's

y has the same effects as direct government provision supply increases and the curve shifts downwards

define sustainable development

'development that meets the needs of the present without compromising the ability of future generations to meet their own needs' MEANS THAT societies should pursue economic growth that does not deplete or degrade natural resources, so that future generations will not have fewer or lowerquality natural resources to satisfy their own needs

ADVANTAGES of tradeable permits for NEP

, the system creates incentives for fi rms to cut back on their pollution if they can do so at relatively low cost. If it is a relatively low cost procedure for a fi rm to reduce its pollutant emissions, it will be in its interests to do so and sell excess permits. Firms that can only reduce pollution at high cost will be forced to buy additional permits. Therefore, both taxes and tradable permits are methods to reduce pollution more effi ciently

why do economists prefer carbon taxes to cap and trade schemes

- Carbon taxes make energy prices more predictable - Carbon taxes are easier to design and implement - Carbon taxes can be applied to all users of fossil fuels. - Carbon taxes do not offer opportunities for manipulation by governments and interest groups. (corruption within ETS) - Carbon taxes do not require as much monitoring for enforcement. - Cap and trade schemes face strong political pressures to set the cap too high - Carbon taxes are less likely to be used to restrict competition between firms

why is monopoly power considered to be socially undesirable

- welfare loss because social surplus is less than max - allocative inefficiency there is an underallocation of resources - productive inefficiency production is not at the lowest possible cost - lower output and a higher price of the industry that the output and price of a more competitive market

what are some issues with government provision of public goods?

- what goods should be provided (we cannot provide all because we dont have infinite funds) - in what quantities? EACH CHOICE HAS AN OPPORTUNITY COST GOV must use economic criteria to decide which good will provide the greatest social benefit for a given amount of money the benefit from each good may be difficult to measure because there is no market price and thus cant be used as an estimate nor reference of the good's value to consumers. SOME METHODS USED ARE SURVEYS that are used as COST-BENEFIT analysis.

what is a natural monopoly

. A natural monopoly is a single fi rm that can produce enough output to satisfy the entire market at a lower cost of production than two or more fi rms (examples include utilities such as gas, water and electricity, as well as postal services and others).

how can asymmetric info failure be corrected with government regulation?

. Legislation and regulation are time-consuming, bureaucratic procedures, which sometimes work to slow down economic activities. It takes a long time, for example, to test new medications and certify their safety, and is a very costly process. regulatory and quality control activities have very large opportunity costs. Just in the case of food safety control, which involves not only food and beverage products but also hygiene in restaurants, there are a huge number of products and service providers involved, who require regulation and monitoring from the level of the farm

where has nationalization usually been most used?

A nationalised fi rm is a government-owned fi rm. Government ownership of a monopoly is sometimes pursued as an alternative to government regulation of privately owned natural monopolies.

A tax on emissions usually has the effect of

A tax on carbon (or on emissions generally) has the effect of creating incentives for producers to reduce the amount of pollution they create by purchasing less polluting resources. This reduces the size of the negative externality and increases the optimum quantity of output. A tax on the output of the polluter does not have this effect; it only reduces the amount of output produced.

Distinguish between a tax on output and a tax on pollutants to resolve a negative externality of production

A tax per unit of output is intended to work by directly correcting the overallocation of resources to the good, resulting in quantity Q opt A tax per unit of pollutants is intended to work by creating incentives for the firm to buy fewer polluting resources (such as fossil fuels), and to switch to less polluting technologies (alternative energy sources). --> having to pay a tax for emissions from fossil fuels, firms costs of production rise so that MPC is equal to MSC. However, if the firms switches to alternative low carbon fuels, Qopt will increase as MSC = MPC +tax shifts downwards because the external costs thata ris from that low carbon fuels are smaller.

define adverse selection

Adverse selection arises when buyers of insurance have more information about themselves than the sellers of insurance. It arises most often in the area of health insurance. Buyers of health insurance know more about the state of their health than sellers of insurance, and those with health problems are unlikely to tell the full truth to the insurance company.

What is an externality

An externality occurs when the actions of consumers or producers give rise to positive or negative side effects that affect third parties not involved in specific transaction and whos interests are not taken into consideration.

EVALUATING GOV and mkt based policies to correct negative externalities.

Both taxes and tradable permits have the effect of internalising the externality, meaning that the costs that were previously external are made internal, because they are now paid for by producers and consumers who are parties to the transaction

Evaluating carbon taxes and cap and trade schemes

CARBON TAXES - fix the price of the pollutant through atax that increases their price and depend on how firms react. ETS - establish a pre-defined limit on emissions, and allow its price to vary. it is more certain.

summarize the correction of negative externalities of production

Correction of negative production externalities involves shifting the MPC curve upward toward the MSC curve through government regulations or market-based policies. For allocative effi ciency to be achieved, the quantity of the good produced and consumed must fall to Q opt as price increases to P opt

in summary, what doe sit take to correct PEC's?

Correction of positive consumption externalities involves either increasing demand and shifting the MPB curve towards the MSB curve through legislation or advertising; or increasing supply and shifting the S=MPC curve downward by direct government provision or by granting a subsidy. Both demand increases and supply increases can lead to production and consumption at Qopt and the achievement of allocative efficiency. The price paid by consumers increases when demand increases, and falls when supply increases.

summarize what does it take to correct a positive externality of production

Correction of positive production externalities involves shifting the MPC curve downward toward the MSC curve through direct government provision or by subsidies. For allocative effi ciency to be achieved, the quantity produced and consumed must increase to Qoptas price falls to Popt.

what are DEMERIT GOODS

Goods that are considered to be undesirable for consumers, but which are over provided by the market cigarettes, alcohol and gambling one reason for overprovision may be that it has negative consumption externalities therefore resources are overprovided to the production of that good ANOTHER reason for over provision may be consumer ignorance or an information failure about the good's negative effcets.

Correcting negative production externalities (Market-based policy)

Gov relies on the market to correct the negative externality of production, two examples are (TAXES and Tradeable permits). TAX --> a tax on the fi rm per unit of output produced, or a tax per unit of pollutants emitted (EXAMPLE IS CARBON TAX) optimal tax policy is to impose a tax exactly equal to the external cost (so that MPC = MSC) tax incidence is incurred by both consumers and producers.

Correcting negative production externalities (GOV REGULATION)

Government regulations - Rely on "command" approach (authority used by the gov to enact legislation) - they tend to try and achieve: limit emissions by setting a limit, limit the qty produced, install technologies that reduce emissions - OBJECTIVE --> make the MPC curve shift upwards to equal the MSC - output restrictions mean that the MPC shifts towards the MSC curve - installment of technologies means incurring extra costs of production so the MPC shifts upwards so that the firms private costs of producing are equal to the MSC. - by this the overallocation of resources is resolved. If firms dont want to comply, they must pay fines.

Evaluating possible responses to safety in the workplace

Governments can provide information to workers about safety conditions in various firms, or they may require employers to provide information to prospective workers about hazards and safety conditions, or they may set minimum safety standards it is diffi cult for the government to cover all possible safety and hazard eventualities, given the very different working environments of different industries and types of work provision of info MAY BE MORE EFFECTIVE Labour unions, for example, often provide this kind of information to their members, but they usually cover only some particular trades and professions in particular industries

why do government failures arise

Governments respond to political pressures created by the influence of powerful interest groups and the sometimes narrow interests of their supporters. (farm price supports) • Governments do not always have all necessary information to formulate appropriate policies. • Intervention in markets is complex, and may often lead to unintended consequences. For example, a policy intended to correct a problem in one area may lead to the unintended creation of a problem in another part of the economy. • Government policies have certain inertia that is sometimes difficult to change. Once particular laws, rules and regulations have been established, they cannot be changed easily because of inflexibility of the political process

what is the GENERAL outcome for negative externalities in terms of allocation of resources?

In general, negative externalities, whether these arise from production or consumption activities, lead to allocative inefficiency arising from an overallocation of resources to the good and to its over provision.

what is teh GENERAL oucome for all type sof POSITIVE externalities in terms of Allocation of resources

In general, positive externalities (external benefi ts), whether these arise from production or consumption activities, lead to an underallocation of resources to the good in question, and therefore to its underprovision.

licensure for asymmetric info such as in the HC industry

In the case of doctors, most countries around the world have laws requiring doctors to be licensed, and a licence can only be obtained upon proof of adequate medical competence Some economists criticise licensing, because it may work to limit the supply of people in a profession, raising the price of their services and increasing their incomes at the expense of consumers who must pay higher prices.

give an example where there is asymmetric information, but the seller is the one missing information that the buyer has

Insurance services are the most common or labour market too

what policy should gov pursue to correct a NCE?

It depends on the nature of the good creating the NEC it is only possible to move the economy towards the correction of the externality, rather than achieving perfect allocative efficiency.

Condition where all positive externalities create external benefits

MSB > MSC The benefit derived from consuming or producing an additional output is greater than the cost involve din the process.

define a monopoly

Monopoly is a type of market structure where: - there is a single firm dominating the market for a product, - where high barriers to entry (factors making it difficult for other firms to enter the industry) and therefore - ensure that the monopoly position of the single seller can be preserved.

What is an example of international cooperation to reduce teh effects from overuse of common access resources?

Montreal Protocol, signed in 1987 and coming into effect in 1989, intended to phase out substances that have caused depletion of the ozone layer. By 2009, all member states of the United Nations had ratifi ed the agreement, and signifi cant progress has been made in the area of phasing out ozone-depleting substances. Kyoto Protocol of 1997-2012. Its objective was to make signatory countries commit themselves to reduce emissions of carbon dioxide and other greenhouse gases over a period of 15 years to slow down the problem of global warming and climate change. EU ETS: covers the sectors of power and heat generation, oil refineries, metals, pulp and paper, and energy intensive industry

Explain the concept of moral hazard

Moral hazard refers to situations where one party takes risks, but does not face the full costs of these risks. It usually arises when the buyer of insurance changes his or her behaviour after obtaining insurance, so that the outcome works against the interests of the seller of insurance. EXAMPLE --> For example, buyers of car theft insurance may be less careful about protecting their car against theft, because they will be reimbursed if someone steals their car

Define moral hazard

Moral hazard refers to situations where one party takes risks, but does not face the full costs of these risks. I

ADVERTISEMENTS for negative ex of consumption

OBJECTIVE: decrease demand for those goods advertising or information campaigns by the government to persuade costumers to buy less of that good. E.g cigarette health risks on the package. MPB shifts downwards towards the MSB curve

Direct government provision to correct PEC's

OBJECTIVE: provide goods with PEC's examples include government (public) provision of education and health care in virtually all countries in the world. this has the effect of increasing supply and so the curve shifts downwards towards the socially optimum level at the intersection with MPB

Advertising to correct PEC's

Objective: persuade consumers to buy more goods with positive externalities encourage the use of sports facilities for improved health they would be increasing demand so the MPB shifts upwards towards the MSB

WHAT IS THE MAIN PROBLEM FROM INSURANCE COMPANIES ON ADVERSE SELECTION

Private insurance companies usually protect themselves against adverse selection by offering a range of policies where the lower the cost of the insurance, the higher the out-of-pocket payments. This offers people choice, so that those who believe they have a low risk of getting sick can buy a lowcost policy with higher out-of-pocket payments, while higher-cost policies with lower out-of-pocket payments can be selected by people who believe they have high levels of health risk. DISCRIMINATION TO THE LOWER INCOME GROUPS lower-income earners choose low-cost policies with high out-of-pocket payments because these are more affordable (as in the case of moral hazard), regardless of the state of their health. From the perspective of equity or fairness (see page 16), this is undesirable because it discriminates against those on low incomes. . Another reason is that in trying to protect themselves against high risks, insurance companies usually refuse to insure people above a certain age, as elderly people generally have a higher chance of becoming ill. The result is that those who mostly need health insurance coverage, poor people who cannot afford to buy health care in the private market, and elderly people who are more likely to become ill, are left with little or no insurance coverage.

what does it mean by maximum sustainable yield

This is the maximum use that can be made of the resource that is also sustainable, in that the resource can reproduce itself All points to the left of the maximum sustainable yield indicate sustainable levels of use; points to the right indicate unsustainable use, meaning that the resource is being depleted or degraded. The further to the right, the greater the resource depletion or degradation

EXPLAIN THE FOLLOWING DIAGRAM/CONCEPT: The maximum sustainable yield of common access resources

Y axis = number of fish caught X axis = number of fishing boats phase 1 - constant avg yield which is where output stays constant, for example, three boats can catch the same amount of fish, usually, tat this point the fish population can replenish and it is not depleating. phase 2 - `decreasing average yield which is when each boat over and above the three boats mentioned previously, can go out and fish but now fish populations have begun to depleat, hence they cant catch as much fishes. (5 boats) phase 3 - Absolutely decreasing yield - now, an additional boat goest to fish and in total, 6 or more boats can catch less fish that the 5 boats could before. As more and more boats go fishing, the total amount they bring back is less. THE SUPPLY OF FISH IN THE OCEAN IS put UNDER PRESSURE from excess fishing. (overuse of the resource)

why does the problem of sustainability arise?

because of conflicts between environmental and economic goals. Economic goals involve efforts to increase the quantities of output produced and consumed. but focusing on these eocnomic goals whilst disregarding the environment may lead to a devastating outcome. Environmental goals involve the preservation of the environment; but focusing on environmental goals while disregarding the economy may result in humankind's inability to satisfy needs and wants.

why are market base policies preferred to solve NEC and NEP

because they internalise the externality: the costs of teh external costs is reflected on the price and is incurred by producers and consumers

an externality in the diagram creates a di...

creates a divergence between MPC and MSC or between MPB and MSB. When there is an externality, the free market leads to an outcome where MPB = MPC, but where MSB is not equal to MSC, indicating allocative ineffi ciency

summarise the correction of NEC's

decrease in demand through government advertising OR or increase in supply through market based policies (excise tax) THEY ALL FOCUS ON DECREASING THE CONSUMPTION OF NEGATIVE EXTERNALITIES

EVALUATING MKT based POLICY for NEC's (taxes)

diffi culties in measuring the value of the external costs (passive smoking for example, how do you measure the costs? also, who is affected, what is affected?) some of the goods whose consumption leads to negative consumption externalities (for example, petrol/gasoline and cigarettes) have an inelastic demand, so a tax may have a slight effect on consumer's behaviour. A VERY HIGH TAX WOULD HAVE TO BE IMPOSED (politically unacceptable)

positive externality of consumption

external benefi ts are created by consumers. For example, the consumption of education benefi ts the person who receives the education, but in addition gives rise to external benefi ts, involving social benefi ts from a more productive workforce, lower unemployment, higher rate of growth, more economic development, lower crime rate, and so on

Negative externalities of consumption

external costs created by consumers. For example, when consumers smoke in public places, there are external costs that spill over onto society in the form of costs to non-smokers due to passive smoking. In addition, smoking-related diseases result in higher than necessary health care costs that are an additional burden upon society

Regulation for monopoly power.

gov most often regulates natural monopolies Because of the natural monopoly's low costs of production, it may not be in societies best interest to regulate them but they are still capable of leading to some socially undesirable outcomes hence around the world they are still regulated, forcing outcomes that are more favourable to consumers: prices can be set at lower levels and quantities produced at higher levels than the unregulated monopolist.

how do public goods link to market failure?

in the case of excludable goods, you can affect consumer's behaviour to prevent their consumption or production o fsuch good by charging a price. but in the case of pyublic goods which are non-excludable, you cant. if a non-excludable good such as a public good were to be produced by a private firm, people could not be prevented from using it without paying. but no profit-maximizing firm would do such thing, therefore the market tends to fail to produce goods that are non-excludable that results in resource misallocation as little resources are allocated towards the production of these goods. (free rider problem)

Market-based policies for negative ex of consumption

involve the imposition of indirect (excise) taxes . Indirect taxes can be imposed on the good whose consumption creates external costs these tend to lead to allocative EFFICIENCY! Supply decreases and so translates to an upward shift of the supply curve. if the tax = external cost, the MPC + tax curve should be above the MSC and intersect the MPB at the qopt.

what is meant by "Pollution of poverty"

occurs mainly in developing countries arises from production and consumption activities that are due to poverty due to economic activities pursued by very poor people in an effort to survive

what is government failure or policy failure?

occurs when government intervention in markets results in less effi cient outcomes than those that would have arisen without the intervention.

free rider problem & public goods

occurs when people can enjoy the use of a good without paying for it. It is a problem that arises from non-excludability. Public goods are a type of market failure because due to the free rider problem, private fi rms do not produce these goods: the market fails to allocate resources to their production.

what is the term that is used for policy failures of subsidies such as those granted to fossil fuels

perverse subsidies

what is the most important cause of environmental destruction according to the brundtland report?

poverty is the most important cause of environmental destruction, due to the overexploitation by poor people of their scarce environmental resources.

marginal private benefits

refer to benefi ts to consumers from consuming one more unit of a good

marginal social benefits

refer to benefi ts to society from consuming one more unit of a good

Negative externalities of production

refer to external costs created by producers. The problem of environmental pollution, created as a side-effect of production activities, is very commonly analysed as a negative production externality

meaning of monopoly power

refers to the ability of a firm or a group of firms to control the price of the product they sell. Monopoly power can be exercised not only by monopolies, but also by firms in oligopolies, where there are a few large sellers

What is sustainability?

refers to the ability of something to be maintained or preserved over time. It can be explained in terms of the joint preservation of the environment and the economy: for the environment it refers to environmental preservation (lack of destruction); for the economy it refers to the preservation of humankind's ability to provide goods and services to satisfy needs and wants into the future

what are common access resources?

resources that are not owned by anyone, do not have a price and are available for anyone to use without payment. They are usually naturlar resources such as forest, clean air, lakes, climate etc. They are RIVALROUS but NON-EXCLUDABLE the use of many people reduces its availability for many others, but anyone can use them and consume them free of charge and so there is no exclusion to anyone from the use of them.

when drawing externalities, becasue the benefits of consuming one more good go to privat eindividuals, teh demand curve represents

s marginal private benefi ts, shown as MPB

Positive externalities mean

side effects of consumers or producers are beneficial. They give rise to positive side-effects or spillover benefits to third parties.

Negative externalities mean

side effects of consumers or producers are negative. The spillover costs affect third parties negatively.

Subsidies to correct positive externalities of production

subsidies can correct allocative inefficiency government provides a subsidy to a firm per unit of the good produced that is equal to the external benefit, then the marginal private cost (MPC = supply) curve shifts downward (or rightward4) until it coincides with the MSC curve The result is to increase quantity produced to Q opt and to lower the price from Pm to Popt. The problem of underallocation of resources and underprovision of the good is corrected, and allocative effi ciency is achieved.

decribe or explain the graph for tradeable permits

supply of permits is perfectly inelastic as it is fixed at a particular level by the government (or an international authority if the scheme is international) This supply of permits is distributed among firms. the demand curve and its intersection with the inelastic supply curve determines the price for the products as an economy grows and firms expand their production, increasing output, it is likely that demand for the permits rise which translates to an upward shift of the demand curve. the price for permits increases Tradeable permits are like taxes on emissions in that they provide incentives to producers to switch to less polluting technologies or resources to abate their anthropogenic emissions that force them to buy credits. Therefore, it is not necessary to buy permits. thus, permits work towards reducing the amount of emissions among firms, hence reducing the negative externality of production and increasing the optimum qty of output produced (like the emissions tax)

EVALUATING advertisement and persuasion for NEC's

the cost to the government of advertising campaigns, which are funded out of tax funds, meaning there are less funds available for use elsewhere in the economy (there are opportunity costs). methods may not be effective enough in reducing the negative externality while regulations (such as prohibiting smoking in public places) can be very effective in reducing the external costs of smoking, they cannot be used to deal with other kinds of negative consumption externalities. For example, it would be very diffi cult to regulate petrol (gasoline) consumption

Marginal cost curve shows

the costs to producers of producing one more unit of output (production cost)

when there is an externality------> why do curves differ

the full benefits or full costs to society differ from the private ones. Therefore there is MSB thet differ from the MPB or MSC that differ from the MPC When this occurs, the equilibrium price and quantity determined by the intersection of the demand (MPB) curve and supply (MPC) curve is no longer a social optimum, because allocative ineffi ciency is introduced by social benefi ts or costs that differ from private ones.

what happens to the diagram curves when there's a NEC?

the marginal private benefit MPB (demand) curve does not reflect social benefits. For example, you have a graph for cigarettes, the demand for these is determined by MPB, however, when they smoke, there are external costs for non-smokers that cause the MSB curve to lie below the MPB curve.

explain the importance of global cooperation.

the overuse of common access resources often has international repercussions, in which case co-operation among governments is crucially important as a method of controlling and preventing negative consequences on certain resources, such as the global climate and the ozone layer.

how are public goods provided

they are provided by the government and financed out of tax revenues for them to be available for the public free of charge.

whya re common access resources a type of market failure?

they are rivalrus and non excludable, so anyone can use them free of charge, but the use of them reduces the availability of them for others, therefore people tend to overuse these resources,e specially because they do not have a price. The final outcome in many cases is pollution, environmental degradation and depletion.

Advantages of government COMMAND AND CONTROL regulations to correct NEP's

they are simple compared to market-based solutions, and can be implemented more easily. The technical difficulties discussed above often make it more practical to impose regulations limiting the amounts of pollution firms can emit. In some situations, the practical difficulties in implementing market-based solutions may be so great that there is no alternative but to use regulatory methods. regulations force polluting firms to comply and reduce pollution levels (which taxes may not always do).

Disadvantages of government command and control regulations to correct a NEP

they do not allow the externality to be internalised, regulations create no market-based incentives, and therefore are unable to make distinctions between fi rms that have higher or lower costs of reducing pollution unable to provide incentives for fi rms to use less polluting resources, and are thus unable to lower the size of the externality pollution is reduced at a higher overall cost they suffer from similar limitations as the market-based policies (lack of suffi cient technical information on types and amounts of pollutants emitted), and so can at best be only partially effective in reducing the pollution created. there are costs of policing, and there may be problems with enforcement.

analyse the negative externality of production in the case of a cement factory

they emit co2 in the process of production which environmentally affects society negatively. This means that over and above the firm's private costs of production, there is a spillover cost to society or third parties involved due to the polluted air or global warming. Therefore the MSC diverges from the MPC, considering the extra cost incurred by societ, which are greater than the firm's private costs. the free market overallocates resources to the production of the good and too much of it is produced relative to the social optimum this misallocation of resources leads to DWL or loss of benefits to society. Society would be better off if less is produced.

Evaluating SUBSIDIES AND DGovP to correct positive production and consumption externalities

very effective in increasing the quantity of the good produced and consumed have the added advantage of lowering the price of the good to consumers involve the use of government funds that rely on tax revenues (opportunity cost). they also dont have the funds to subsidize all goods with PE's and so they have to make choices which goods should be supported? by how much? it is very difficult to measure the value of the external benefits highly political in nature, as different groups compete with each other over who will receive the most benefits it is very unlikely that governments are able to shift the MPC or MPB curves by the amount necessary to correct the positive externalities. The most that can be hoped is that the policies in question will be a step in the right direction

GOV Regulation for negative ex of consumption

y. Regulations can be used to prevent or limit consumer activities that impose costs on third parties, such as legal restrictions on activities as smoking in public places. The effect is that of shifting the MPB downwards towards MSB until they overlap. eliminating the externality.