title moment

    PPT - Externalities

    Terminology

    • Demand: private benefits that consumers receive
    • Supply: private costs of production
    • MPC (Marginal Private Cost): costs to producers of producing one more unit of a good
    • MSC: costs to society of producing one more unit of a good
      • $MSC=MPC+MEC$ where $MEC=$ marginal external costs
    • MPB: Benefits to consumers from consuming one more unit of a good
    • MSB: benefits to society from consuming one more unit of a good
    • When MPC=MSC and MPB=MSB, socially optimal equilibrium is achieved.
    • WHEN $MPC=MSC=MPB=MSB$, allocative efficiency is achieved
    Externalities
    • Occur when the production or consumption of a good/service cause external costs and/or external benefits
      • because Side effects of economic activity to a third party or unintended consequence of economic activity
    • Externalities cause market failure if the price mechanism does not take into account the social costs and benefits of production and consumption

    The distinction between positive and negative externalities

    Negative Externalities
    • Occurs when production and/or consumption creates an external cost
    • Causes overconsumption/production - there's always more than what we want being produced
      • Market quantity is greater than optimal quantity
      • Market price is less than optimal price
    • Results in deadweight loss
    • Two types: a Negative Production Externality and a Negative Consumption Externality
    Negative Production Externality
    • Where the marginal social cost of production is higher than the marginal private cost
    • Examples include
      • air
      • land
      • noise pollution
    Negative Consumption Externality
    • Where the marginal social benefit of consumption is lower than the marginal private benefit
    • Examples include
      • Smoking
      • Smoking
      • Smoking
      • Alcoholism
      • Smoking
      • Alcoholism
    Positive Externalities
    • External benefits of consumption or production for third parties
      • Causes under consumption or under production
      • Results in a DWL
    Positive Consumption Externality
    • Where the marginal social benefit of consumption is higher than the marginal private benefit
    • Examples include
      • Flu vaccines
      • Education
    Positive Production Externality
    • Where the marginal social cost of production is lower than the marginal private cost
    • Examples include
      • Lower transport costs for local firms following construction of new roads

    How an externality can influence market efficiency i.e. a deadweight loss

    Policy options to correct for externalities, including the use of taxes and subsidies

    Regulation/Legislation
    Negative Production Externality
    • Regulations can forbid the dumping of pollutants to the environment
      • Limit the amount of pollutants using a maximum amount
      • Limit the quantity of output to producers
      • Require technologies (methods of production) to reduce emissions
    Negative Consumption Externality
    • Prevent consumer activities such as legal restrictions to smoking (public areas)
    • Reduce demand towards $MSB$
      • Quantity lowered to $Q_o$ and price to $P_o$
    Positive Production Externality
    • Direct government provision;
      • coming out of government funds
    • $MPC$ shifts towards $MSC$
    • Quantity increases to $Q_o$ and price decreases to $P_o$
    Positive Consumption Externality
    • Legislation: used to increase consumption e.g. compulsory ages to education
    • Advertising: used to increase consumption e.g. public advertisement for education
    • Demand increases from MPB to MSB
    • Quantity increases to $Q_o$ and price increases to $P_o$
    Market Based Approaches
    Negative Production Externality
    • Imposing a tax on per unit of production or pollutant emission
    • Internalise the external cost (recognition)
    Negative Consumption Externality
    • Impose indirect tax the size of the external cost
    • The impact of the tax is passed onto consumers as a higher price they now have to burden
    • Quantity drops to $Q_o$ and price increases to $P_c$
    Positive Production Externality
    • Government can provide subsidies the size of the external benefit (internalise)
    • MSC=MPC + subsidy
    • Quantity increases to $Q_o$ and price falls to $P_o$
    Positive Consumption Externality
    • Direct Provision to increase consumption e.g. education and healthcare
    • Supply increases the size of government provision
    • Quantity falls to $Q_o$ and price to $P_c$
    • Subsidies
      • Government can provide subsidies to producers to lower the cost and hence lower the price for consumers
      • Subsidy used to internalize the external benefit
      • Quantity higher at Qo and price lower at pc

    Notes on Research

    • make sure to not explain/define what the thingos are, mpc msc whatevs
    • don't contradict yourself and make sure all information is correct
    • like 15 references
    • need gov regulation and tax, so both a market based approach and regulation/legislation

    unit 1 and 2 datas and a unit 2 extended response
    multiple choice is everything