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when do positive externalities occur
when production and/or consumption create external benefits on third parties outside of the market
what do positive externalities create
3rd party spillover benefits
what is the result of positive externalities
social benefit of production/consumption is greater than the private benefit
name external benefits of positive externalities
lower costs for other parties, increase revenues for other parties, increased satisfaction for other parties
what are positive externalities associated with
merit goods and services
give 2 examples of positive production externalities
flood defence projects that protect the whole community, projects to reduce deforestation
give examples of positive consumption externalities
healthcare/childcare/flu vaccines, education
give an example of using positive externalities
the decline of public libraries
what are reasons for declining usage of libraries
rise of e-books, libraries are outdated, cuts in local authority funding
what are approaches to increase the use of libraries
sharing of digital network resources, investment in free wifi, national library card
when do negative externalities occur
when production and/or consumption impose costs on third parties outside of the market
give 3 examples of negative production externalities
air pollution from factories, damage to the environment, noise pollution from airline industry
give 3 examples of negative consumption externalities
effects of passing smoking, impact on family life of gambling and alcohol addiction, noise pollution from concerts
compare co2 emissions in 2010 and 2022
2022- 36.5 billion metric tonnes/ 2010- 32.8 billion metric tonnes
how is the externality of carbon emissions been reduced
the EU carbon Emissions trading scheme is a cap and trade scheme which sets a decreasing cap for co2 from energy intensive sectors and allocates or auctions emissions allowances
what has the UK done to reduce carbon emissions
introduced a carbon price floor- minimum price for carbon emission to provide a stable carbon signal
name a major cause of market failure
externalities
how do externalities cause market failure
if the price mechanism does not take account of the social costs and benefits of production and consumption
private cost
costs faced by the producer or consumer directly involved in a transaction
private benefits
benefits for producer and/or consumer directly involved in an economic transaction
how to calculate social cost
social cost= private cost + external cost
how to calculate social benefit
private benefit + external benefit
marginal private cost
cost to the producers producing an additional unit of output
marginal external cost
cost to third parties from the production of an additional unit of output
marginal social cost
total cost to society of producing an extra unit of output- MSC = MPC + MEC
marginal private benefit
benefit to the consumer of consuming an additional unit of output
marginal external benefit
benefit to third parties from the consumption of extra unit of output
marginal social benefit
total benefit to society from consuming an extra unit- MSB = MPB+ MEB
merit goods
goods and services that the government feels that people will under-consume and might be subsidised or made free
what sectors provide merit goods
state and private
what are features of merit goods
rival, excludable and rejectable
what externality do merit goods produce
positive externality- social benefit from consumption exceeds the private benefit
examples of merit goods
health programmes, public libraries, free school meals
why are there rising healthcare demands
ageing population, rising expectations, inequality, growing population
public good characteristics
non-excludable, non-rival, non-rejectable
non-excludable
non-payers can enjoy benefits of consumption
examples of public goods
street lights, flood control systems
non-rival
benefit other people get from the good does not diminish if more people consume the good
free-rider problem
people who do not pay for the good still receive benefits from it. reason for public goods being underprovided by the private sector as they do not make profit from providing the good
why are public goods underprovided
free-rider problem, difficult to measure value consumers get from the good so it harder to price
who provides public goods
the government
how are outputs of public goods decided
gov has to estimate the social benefit of the public good when deciding the output
how are public goods funded
using tax revenue, but quanitity provided will be less than socially optimum quantity
characteristics of a private good
rival and non-excludable
symmetric information
consumers and producers have perfect market information to make their decision. this leads to an efficient allocation of resources
information failure
occurs when people have innacurate or incomplete data and can make potentially ‘wrong choices/decisions’
where can perfect information be found
in competitive markets
causes of information failure
long term consequences, complexity, unbalanced knowledge, price information
examples of information failure
risks from using tanning salons, addiction to painkillers/drugs, gaining entry to elite degree courses
asymmetric information
an imbalance in information between buyer and seller which can distort choices
moral hazard
insured consumers are likely to take greater risks, knowing that a claim will be paid for by their cover
examples of policies addressing information failures
compulsory labelling on products, improved nutritional information, performance league tables
indirect tax
tax imposed by the government that increases the supply costs faced by producers
how is indirect tax shown on a graph
by the vertical distance between the two supply curves
examples of indirect tax
VAT, sugar tax, alcohol duties
ad valorem tax
imposes tax on a good, depending on its value- expressed as a percentage
regressive tax
imposed by government which takes a higher percentage of someone’s income from those on low incomes
why are indirect taxes used
key source of tax revenue for gov. spending, can be used to change consumer and producer behaviour
explain the plastic packaging tax
taxes plastic packaging manufactured in or imported into the UK and does not contain at least 30% recycled plastic
factor immobility
when a factor of production cannot easily be moved to another area of the economy
reasons for geographic immobility
large house-price, rent and cost of living differences, social ties, imperfect information about jobs available in different areas
occupational mobility
when there are barriers to the mobility of factors of production between different industries
reasons for occupational immobility
lack of training, education and skills required to do a different job
lack of required qualifications
why does immobility cause market failure
there is a misallocation of resources
how to reduce geographical immobility
rise in house building, gov. relocation of subsidies/ mortgage relief
how to reduce occupational immobility
better funding of training, teaching new skills or expansion of apprenticeship/internship programmes
how is inequality caused
wage differences, discrimination, regressive taxes
how is inequity a cause of market failure
people do not have income and wealth to pay for things they need
how is inequity a consequence of market failure
free market leads to inequitable distribution of income and wealth with misallocation of resources
subsidy
any form of government support offered to producers to reduce the marginal cost of supply
what do subsidies lead to
an increase in the output sold of a good or service at a lower market price
examples of gov. subsidies
solar panels, wind farm investment, steel manufacturing
gov subsidies to consumers
people buying electric vehicles, food and energy subsidies
disadvantages of subsidies
producers can become ‘subsidy dependent’, distort resource allocation, excess production/ surpluses
maximum prices
legally imposed maximum price in a market that suppliers cannot exceed
aim of maximum prices
improve affordability of a good or service to consumers especially those on lower incomes
examples of maximum prices
rent controls (e.g. in portland oregon in 2020), utility price caps
minimum price
legally imposed price floors mostly associated with minimum hourly wage rates
examples of minimum price
minimum wage in the UK, minimum unit pricing (scotland introduced minimum price of alcohol in 2018)
examples of state provided goods
education and healthcare
benefit of state provided goods
makes merit goods more accesible, increasing their consumption and create positive externalities
regulations
rules enforced by an authority to try to reduce market failure and its impacts
why is regulation used
to reduce the use of demerit goods and services, reduce the power of monopolies, increase consumption of merit/demerit goods
examples of regulatory failures
limit innovation, capping prices could prevent new firm from entering a market, technology
