Externalities Worksheet flashcards - GPT GENERATED

Define externality

An effect from market activity which impacts on bystanders/third parties and can be positive or negative

Explain what is meant by market failure

Market failure is when allocative efficiency is not achieved

Define infrastructure

Infrastructure is physical capital essential for the economy such as bridges

Negative externalities of HS2

Eradication of wildlife habitats

Externalities of iron ore mining

Land degradation destroying farming land use

Costs of takeaway food consumption

Strain on health services due to unhealthy food

Why concrete is bad for the environment

Covers fertile soils

Why wind energy may not be environmentally perfect

Concrete bases anchor windmills

Why waterways and air are common access resources

They are non-excludable

How firms exploit common access resources

Firms reduce costs by dumping waste into rivers or polluting air without treatment

Example of a positive consumption externality

Fresh fruit – healthier people reduce NHS strain and boost productivity

Define merit good

A good with positive consumption externalities

Examples of merit goods

Academic books

Why fruit is under-consumed in Britain

Expensive

Nudges to increase fruit consumption

Free school fruit

Spillover effects of increased fruit consumption

Healthier and happier population

Define technological spillover

Beneficial effects of new tech knowledge on productivity and innovation of others

Examples of moon landing tech spillovers

Cooling suits for MS patients

Positive production externalities of Everton stadium

Urban redevelopment

Honey production externality

Pollination increases agricultural productivity

Define 3rd party

Someone affected by market activity without being a producer or consumer

Spillovers from Glastonbury Festival

Litter

Steel production and externalities

Overproduction due to pollution (SO₂)

Uses of steel

Surgical tools

Alternative to Pigouvian tax for steel

Carbon tax – incentivizes cleaner production

Define pollution permits

Tradable rights to emit a set amount of CO₂ or other pollutants

Effect of economic growth on permit demand

Demand increases due to higher production and pollution

Firms best positioned to sell permits

Firms that can easily switch to clean production or new industrial sites

Why permits decrease over time

To signal increasing scarcity and encourage clean production planning

Ethical view on selling pollution rights

Trade-offs exist – permits may be the most realistic and effective path

Advantage of cap-and-trade over Pigouvian tax

More predictable emissions limit

Arguments for pollution permits

Realistic method with measurable progress

Command and control inefficiency

Treats all firms the same regardless of individual pollution reduction costs

Net-zero and rising costs

Energy prices rise due to fossil fuel limits and poor domestic production choices

Negative production externalities

Front garden paving

Negative consumption externalities

Fast food

Positive production externalities

Gentrifying cities

Positive consumption externalities

Academic books

Effect of minimum alcohol pricing in Scotland

Price floor reduces quantity demanded and shifts output toward optimal level

Why minimum alcohol price needs adjustment

Inflation makes fixed price ineffective over time

Policies to reduce fast food consumption

Indirect taxes

Why carbon tax is better than Pigouvian tax

Targets dirty production specifically and incentivizes cleaner methods

Market-based solutions to pollution

Pigouvian tax

Why economists prefer market-based tools

Less need for oversight

Downsides of market-based solutions

Hard to set optimum level

Define collective self-governance

Voluntary group agreements to manage common access resources and avoid overuse

Limitations of collective self-governance

Unlikely to work in international or highly competitive settings (e.g. cod fishing)

Externalities of smoke alarms

Warn neighbors of fires

Why wood burners cause externalities

Burning causes harmful particulates and pollution especially when used improperly

Why lighthouses are public goods

Non-excludable and non-rivalrous – everyone benefits from the light

How a private firm could benefit from building a lighthouse

Increase port traffic and reduce their shipping costs

Why UK education is an impure public good

Non-excludable by law but rivalrous due to overcrowding and limited resources

How education is also a club good

Private education is excludable and provides benefits to members only