1.3.2 Externalities

Question 1

what are negative externalities (external costs)?

two types of negative externalities

Answer 1

costs which affec third parties outsid the price transaction
* negative consumption externalities
* negative production externalities

negative effect on others

Question 2

what is
* social cost
* social benefits

Answer 2

• social cost= external cost + private cost
• social benefits= external benefits + private benefits

Question 3

what is the price transaction ?

Answer 3

the transaction between the consumer and producer

Question 4

what are two diagrams that edexcel require you to know?

Answer 4

• negative production diagram
• positive consumption diagram

Question 5

how do you draw externaility diagrams?

negative/ positive, consumption/production, welfare triangle

Answer 5

if
* negative = social to the left
* positive= soical to the right
* production= affects costs
* consumption = affects benefits
* welfare traingle= always pointing towards social equilibrium

Question 6

what are negative consumption externalities?

Answer 6

when consuming a good leads to costs to third parties outide the price transaction

eg: alchohol, cars

Question 7

what are negative production externalities?

Answer 7

when producing goods leads to costs to third parties outside the price transaction

eg: building buildings, factories

Question 8

what are private costs?

Answer 8

a cost to a producer or consumer within the price transaction

Question 9

what is market failure?

Answer 9

when the price mechanism leads to an inefficent allocation of resources

price/quantity produced not beneficial to society

Question 10

what are the 4 types of market failure?

Answer 10

1. negative externalities
2. positive externalities
3. public goods (under provision)
4. information gaps

Question 11

what is the socially efficent equilibrium?

Answer 11

marginal social costs = marginal social benefits
* society welfare is maximised

Question 12

what do the demand and supply lines becomes in production externality diagrams?

Answer 12

• demand line= marginal private benefits (utility)- MPB
• supply line= marginal private cost -MPC

Question 13

Draw a negative production externality/ external costs of production diagram

Answer 13

as quanity increases the external costs increase

Question 14

what is the welfare loss?

Answer 14

distance between socially efficent equailibrium and the market intersection (MPC & MPB)
* Traingle shape
* Difference in quantity = overproduction

Question 15

what are negative consumption externailities?

Answer 15

when the consumption off goods such as cigareetes leads to external costs (secondary inhaling)

Question 16

what are welfare losses the causes of?

Answer 16

• overproduction
• overconsumption

Question 17

how do goverments counteract welfare losses?

Answer 17

indirect tax on goods and services
* tax size= external costs
* ‘negative production externality has been internalised’
* production moved to socially efficent equilibrium

Question 18

draw a negative production externality with tax diagram

Answer 18

tax internalises the negative production externality

Question 19

how does the cap and trade system work?

Answer 19

1. goverment set up a pollution cap
2. gives out permits to firms depending on size
3. last 10 % are autioned- raising tax revenue
4. these permits are the tradable

Question 20

what are minimum prices?

Answer 20

the lowest price suppliers of a good can legally sell for
* price set above the equailibrium price
* creates excess supply
* market stuck in disequilibrium

reduction of over consumption

Question 21

what is regulation?

Answer 21

when the goverment makes changes to the law to adress market failure

Question 22

what are some eamples of regulation?

Answer 22

• banning goods completley (guns, class A drugs) becuase extrenal costs too severe
• set enviromental standards
  *

Question 23

what are tradable pollution permits?

Answer 23

permits which allow firms to pollute up to a certain limit. These permits are then tradable between firms

eg: europe emissions trading scheme

Question 24

what are positive externalities?

Answer 24

benefits that affect others outside the price transaction

Question 25

What are positive consumption externalities?

Answer 25

when the consumption of a good leads to external benfits | vaccines, educational courses

Question 26

what are postive production externalities?

Answer 26

when the production of a good leads to external benefits | beekeepers, solar pannels,

Question 27

draw the positive consumption externality diagram

Answer 27

Question 28

how do subsidies solve positive externalities?

Answer 28

* help underconsumption * help underproduction

Question 29

define externalilties

Answer 29

The cost or benefit a third party receives from an economic transaction outside of the market mechanism

Question 30

define potential social welfare gain

Answer 30

the excess of social benefit over social cost for a given quanitity

Question 31

define social welfare loss

Answer 31

the excess of social cost over social benefit for a given output

Question 32

what are the external benefits from bus journeys?

Answer 32

reduced road congestion reduced air pollution | better than taking one car per person

Question 33

what are the positive consumption externalities of vaccines?

Answer 33

* reduction in the spread of disease--> healthier population--> more productive workforce * less absenteeism from work due to ill health --> more profits for firms

Question 34

what are the negative production externailities of extracting quarrrying stone?

Answer 34

* noise pollution from lorries * fall in nearby property prices * air pollution from dust * damage to wildlife

Question 35

what are postive consumption benefits of higher education?

Answer 35

* more skilled workforce--> more productive workforce --> more profit for firms

Question 36

what are the analysis points for air pollution? | producer/ consumer/ government framework

Answer 36

* air pollutuon--> lung disease/ redution is air quality * external costs on consumers outside the price transaction * worsening health and reducing consumer living standards * greater strain on the NHS, worsening the government's budget deficit or diverting funds from other areas such as education * reducing external benefits

Question 37

what are the analysis points for renewable energy?

Answer 37

* help to reduce air pollution * help government reach air pollution targets * improving air quality for consumers, improving health and living standards

Question 38

what are the analysis points for damage to goods/ services

Question 39

what are the analysis points for new jobs?

Answer 39

* new jobs for *specific occupation* * *specific occupation* will spend their incomes in the local economy * local firms will make more sales, increasing revenues and profits * government will recieve higher income tax revenue from the *specific occupation*, higher VAT revenue from the increased spendning and higher corporation tax revenue from firm's higher profits | specific occupation= aerospace engineers

Question 40

what are the analysis points for noise pollution?

Answer 40

* noise makes sleep difficult * disrupting day- to day life and increasing stress, reducing living standards * also negative impacts on produers as areas with high noise pollution will be less visited by consumers * firms demand will fall, decreasing their revenue and profit

Question 41

EVALUATION PARA FOR NOISE POLLUTION QUANITIFYING

Answer 41

* However, it is difficult to quantify external costs like noise pollution * there is missing information as to how many people are affected by the noise pollution * and adding up the effect on everyone can prove to be difficult * Moreover, to determine the cost of noise pollution requires a value judgment because costs are normative * so we cannot accuratley quantify the external costs

Question 42

explaining the negative / positive externaility diagram

Answer 42

* external benefits/ costs such as ..... * mean that MSB/MSC is above MPB/MPC... * consumers would under consumer/ producers would over produce * creating a social welfare gain/loss * so society benefits from increased..../ negativley affecting society

Question 43

what are the analysis points for new technology/ advancements?

Answer 43

* new technology--> increased efficency * firms reduce costs and increase profits * increasing government corportation revenue, * which it could invet further into education... leading to more research and development

Question 44

what are the analysis chains for alcoholism?

Answer 44

* worsening health of students * decreased future productivity * reducing firms profits * poorer health --> strain on the NHS, worsening government budget deficit

Question 45

time evaluation for higher education (external benefits)

Answer 45

However, degrees take years to complete, so in the short run firms will not enjoy any external benefits. In fact because students are studying instead of working, firms will lose out in the short run because fewer workers are availiable. In the long run benefits may not be seen if students do not complete tehir degrees