39290404
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Mind Map by Andrea Santiago, updated 8 months ago
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Externalities
- Production Externalities
- Positive Externalities of Production
- 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, society benefits from
widespread adoption of the new
technology. Therefore, the social costs
of research and development are lower
than the private costs.
- Welfare Loss
- The underallocation of resources
to the production of a good with a
positive production externality
leads to a welfare loss. It involves
external benefits for society that
are lost because not enough of
the good is produced. If the
externality were corrected,
society would gain the benefits
represented by the shaded area.
- The underallocation of resources
to the production of a good with a
positive production externality
leads to a welfare loss. It involves
external benefits for society that
are lost because not enough of
the good is produced. If the
externality were corrected,
society would gain the benefits
represented by the shaded area.
- Correcting positive production externalities
- Direct government provision
- A solution often pursued by
governments involves direct
government production of the
good or service creating the
positive production externality.
governments often engage in
research and development. The
government can also directly
provide training for workers.
This shifts the supply curve to
the right, (increasing it) and
drops the price to optimum.
- A solution often pursued by
governments involves direct
government production of the
good or service creating the
positive production externality.
governments often engage in
research and development. The
government can also directly
provide training for workers.
This shifts the supply curve to
the right, (increasing it) and
drops the price to optimum.
- Subsidies
- If the 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 rightward) until it coincides
with the MSC curve. The result
is to increase quantity
produced to Qopt and to lower
the price from Pm to Popt.
- If the 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 rightward) until it coincides
with the MSC curve. The result
is to increase quantity
produced to Qopt and to lower
the price from Pm to Popt.
- Direct government provision
- Welfare Loss
- 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, society benefits from
widespread adoption of the new
technology. Therefore, the social costs
of research and development are lower
than the private costs.
- Negative Externalities of Production
- 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.
- Welfare loss
- a loss of social benefits due to
overproduction of the good caused by
the externality. If the externality were
corrected, so that the economy reaches
the social optimum, the loss of benefits
would disappear. he shaded area
represents the welfare loss arising from
the negative production externality.
Society would be better off if less were
produced.
- a loss of social benefits due to
overproduction of the good caused by
the externality. If the externality were
corrected, so that the economy reaches
the social optimum, the loss of benefits
would disappear. he shaded area
represents the welfare loss arising from
the negative production externality.
Society would be better off if less were
produced.
- Correcting negative production externalities
- Government regulations
- Government regulations to deal with
negative production externalities rely on
the ‘command’ approach, where the
government uses its authority to enact
legislation and regulations in the public’s
interest. More commonly, regulations do
not totally ban the production of
pollutants, but rather attempt to achieve
one of the following: • limit the emission of
pollutants by setting a maximum level of
pollutants permitted • limit the quantity of
output produced by the polluting firm •
require polluting firms to install
technologies reducing the emissions.
- Government regulations to deal with
negative production externalities rely on
the ‘command’ approach, where the
government uses its authority to enact
legislation and regulations in the public’s
interest. More commonly, regulations do
not totally ban the production of
pollutants, but rather attempt to achieve
one of the following: • limit the emission of
pollutants by setting a maximum level of
pollutants permitted • limit the quantity of
output produced by the polluting firm •
require polluting firms to install
technologies reducing the emissions.
- Market-based policies
- Imposing a tax
- The government could impose a
tax on the firm per unit of output
produced, or a tax per unit of
pollutants emitted. The optimal (or
best) tax policy is to impose a tax
that is exactly equal to the
external cost, so the MPC curve
shifts upward until it overlaps with
MSC. The new equilibrium results
in the lower, optimal quantity of
the good produced, Qopt, and
higher, optimal price, Popt.
- The government could impose a
tax on the firm per unit of output
produced, or a tax per unit of
pollutants emitted. The optimal (or
best) tax policy is to impose a tax
that is exactly equal to the
external cost, so the MPC curve
shifts upward until it overlaps with
MSC. The new equilibrium results
in the lower, optimal quantity of
the good produced, Qopt, and
higher, optimal price, Popt.
- a tax on pollutants (emissions)
- A tax on emissions (carbon tax)
is set on specific company and
encourages the use of green
technology. The result is that if
the firm switches to alternative,
less polluting resources, Qopt
will increase, because the
external costs of producing the
output will become smaller.
- A tax on emissions (carbon tax)
is set on specific company and
encourages the use of green
technology. The result is that if
the firm switches to alternative,
less polluting resources, Qopt
will increase, because the
external costs of producing the
output will become smaller.
- Tradable permits
- These permits to pollute can be
traded (bought and sold) in a
market. If a firm needs to emit
more pollutants than the level
set by its permits, it can buy
more permits in the market. As
an economy grows and the
firms increase their output
levels, the demand for permits
is likely to increase, as shown
by the rightward shift of the
demand curve from D1 to D2.
With supply fixed, the price of
permits increases from P1 to
P2.
- These permits to pollute can be
traded (bought and sold) in a
market. If a firm needs to emit
more pollutants than the level
set by its permits, it can buy
more permits in the market. As
an economy grows and the
firms increase their output
levels, the demand for permits
is likely to increase, as shown
by the rightward shift of the
demand curve from D1 to D2.
With supply fixed, the price of
permits increases from P1 to
P2.
- Imposing a tax
- Government regulations
- Welfare loss
- 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.
- Positive Externalities of Consumption
- external benefits are created by
consumers. For example, the
consumption of education benefits the
person who receives the education, but in
addition gives rise to external benefits,
involving social benefits from a more
productive workforce, lower
unemployment, higher rate of growth,
more economic development, lower crime
rate, and so on. Similarly, the
consumption of health care services
benefits not only the person receiving the
services but also society and
the economy,
because a healthier population is more
productive, enjoys a higher standard of
living and may have a higher rate of
economic growth.
- The case of 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:
- Consumer ignorance
- Consumers may be better off if they
consume certain goods and services
but they may be ignorant of the
benefits, and so do not demand them.
- Consumers may be better off if they
consume certain goods and services
but they may be ignorant of the
benefits, and so do not demand them.
- Low levels of income
and poverty.
- Some consumers may want
certain goods or services but
cannot afford to buy them.
- Some consumers may want
certain goods or services but
cannot afford to buy them.
- positive
externalities
- In this case too little is provided by the
market. Examples of merit goods include
education and immunization programes.
- In this case too little is provided by the
market. Examples of merit goods include
education and immunization programes.
- Consumer ignorance
- Merit goods are goods that are held to
be desirable for consumers, but which
are underprovided by the market.
Reasons for underprovision include:
- Correcting positive consumption externalities
- Subisidies
- A subsidy to the producer of the good with the
positive externality has the same effects as
direct government provision. It results in
increasing supply and shifting the supply curve
rightward (or downward), as shown in Figure
5.14(c) (which is the same as Figure 5.14(b)). If
the subsidy is equal to the external benefit, the
new supply curve is MPC − subsidy, and it
intersects MPB at the Popt level of output.
- A subsidy to the producer of the good with the
positive externality has the same effects as
direct government provision. It results in
increasing supply and shifting the supply curve
rightward (or downward), as shown in Figure
5.14(c) (which is the same as Figure 5.14(b)). If
the subsidy is equal to the external benefit, the
new supply curve is MPC − subsidy, and it
intersects MPB at the Popt level of output.
- Direct government provision
- Governments are frequently involved in the direct
provision of goods and services with positive
consumption externalities. The most important
examples include government (public) provision of
education and health care in virtually all countries
in the world. has the effect of increasing supply
and therefore shifting the supply curve S rightward
(or downward) to S + government provision. To
achieve the social optimum Qopt, the new supply
curve must intersect MPB at the level of output Q
opt, as seen in the figure. At the new equilibrium,
price falls to Pc
- Governments are frequently involved in the direct
provision of goods and services with positive
consumption externalities. The most important
examples include government (public) provision of
education and health care in virtually all countries
in the world. has the effect of increasing supply
and therefore shifting the supply curve S rightward
(or downward) to S + government provision. To
achieve the social optimum Qopt, the new supply
curve must intersect MPB at the level of output Q
opt, as seen in the figure. At the new equilibrium,
price falls to Pc
- Advertising
- Governments can use
advertising to try to persuade
consumers to buy more goods
with positive externalities. For
example, they can try to
encourage the use of sports
facilities for improved health.
The objective is to increase
demand for such services, and
the effect is the same as with
legislation.
- Governments can use
advertising to try to persuade
consumers to buy more goods
with positive externalities. For
example, they can try to
encourage the use of sports
facilities for improved health.
The objective is to increase
demand for such services, and
the effect is the same as with
legislation.
- Legislation
- Legislation can be used to
promote greater consumption of
goods with positive externalities.
For example, many countries have
legislation that makes education
compulsory up to a certain age. In
this case, demand for education
increases, and the demand curve
D1 = MPB shifts to the right (or
upward), as in Figure 5.14(a).
Ideally, it will shift until it reaches
the MSB curve, where D2 = MSB,
and Qopt is produced and
consumed.
- Legislation can be used to
promote greater consumption of
goods with positive externalities.
For example, many countries have
legislation that makes education
compulsory up to a certain age. In
this case, demand for education
increases, and the demand curve
D1 = MPB shifts to the right (or
upward), as in Figure 5.14(a).
Ideally, it will shift until it reaches
the MSB curve, where D2 = MSB,
and Qopt is produced and
consumed.
- Subisidies
- Welfare loss
- represents the loss of social benefits
due to underproduction of the good. If
this externality were corrected, society
would gain the benefits represented
by the shaded area. the difference
between the MSB and MSC curves for
the amount of output that is
underproduced relative to the social
optimum (Q opt – Q m).
- represents the loss of social benefits
due to underproduction of the good. If
this externality were corrected, society
would gain the benefits represented
by the shaded area. the difference
between the MSB and MSC curves for
the amount of output that is
underproduced relative to the social
optimum (Q opt – Q m).
- The case of merit
goods
- external benefits are created by
consumers. For example, the
consumption of education benefits the
person who receives the education, but in
addition gives rise to external benefits,
involving social benefits from a more
productive workforce, lower
unemployment, higher rate of growth,
more economic development, lower crime
rate, and so on. Similarly, the
consumption of health care services
benefits not only the person receiving the
services but also society and
the economy,
because a healthier population is more
productive, enjoys a higher standard of
living and may have a higher rate of
economic growth.
- Positive Externalities of Production
- Consumption Externalities
- Negative Externalities of Consumption
- refer to 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. When
there is a consumption externality, the
marginal private benefit (demand) curve does
not reflect social benefits.
- Welfare loss
- Negative externalities of consumption refer to
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
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.
- Negative externalities of consumption refer to
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
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.
- Correcting negative consumption externalities
- Government regulations
- 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. This causes demand to fall
until it eliminates the externality.
- 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. This causes demand to fall
until it eliminates the externality.
- Advertising
- Advertising and campaigns by the
government can be used to try to
persuade consumers to buy fewer
goods with negative externalities,
such as anti-smoking campaigns. The
objective is to try to decrease
demand
for such goods, and the
effects are the same as with
government regulations .
- Advertising and campaigns by the
government can be used to try to
persuade consumers to buy fewer
goods with negative externalities,
such as anti-smoking campaigns. The
objective is to try to decrease
demand
for such goods, and the
effects are the same as with
government regulations .
- Market-based policies
- Market-based policies Market-based policies to
correct negative consumption externalities
involve the imposition of indirect (excise) taxes.
Indirect taxes can be imposed on the good
whose consumption creates external costs they
raise the price so people use less.
- Market-based policies Market-based policies to
correct negative consumption externalities
involve the imposition of indirect (excise) taxes.
Indirect taxes can be imposed on the good
whose consumption creates external costs they
raise the price so people use less.
- Government regulations
- Welfare loss
- refer to 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. When
there is a consumption externality, the
marginal private benefit (demand) curve does
not reflect social benefits.
- Negative Externalities of Consumption
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