Externalities

Question 1

What is an:

Externality

Answer 1

A spillover effect on a third party

Question 2

What leads to:

Market failure

Answer 2

Allocative inneficiency of externalities

Question 3

How can the:

Government encourage goods with positive externalities to be produced

Answer 3

• Subsidies which increase the revenue of the firm that produces positive externalities
• This will lead to a price drop as they are earning money from the government
• More consumers will consume the product due to the lower price

The opposite can apply

Question 4

What are:

Pollution permits

Answer 4

• Firms get set a limit to their pollution per year
• High taxes have to be paid if the company goes over the limit
• This encourages firms to decrease their pollution
• These are tradeable licenses, which means that firms can make money out of selling their permits to companies who exceed

Question 5

Definition of:

Pollution permits

Answer 5

A pollution permit is a legal right given to firms to pollute a certain amount