2.8 Market Failure: Externalities & Common Pool (Access) Resources (DP IB Economics: HL): Flashcards

The socially optimum output occurs where marginal social benefit (MSB) = marginal social cost (MSC).

At the socially optimum output there is allocative efficiency because community surplus is maximised.

On a market failure diagram, the Y-axis is labelled costs/benefits instead of price.

Negative externalities of production are external costs created during the production of a good or service, causing over-provision because only private costs are considered.

It over-provides because producers consider only their private costs, ignoring the external costs imposed on third parties.

True.

The external costs of production mean marginal social cost (MSC) exceeds marginal private cost (MPC).

At the free-market equilibrium marginal private cost (MPC) equals marginal social benefit (MSB).

The free market over-provides a good with a negative production externality by an amount equal to Qe - Qopt.

Negative externalities of consumption are external costs created during the consumption of a good or service, causing over-consumption because only private costs are considered.

At the free-market equilibrium marginal private benefit (MPB) equals marginal social cost (MSC).

If the external costs of a negative consumption externality were accounted for, demand would decrease and the good would sell at a lower price.

Demerit goods are goods that have external costs in consumption and are usually addictive and harmful for consumers.

Because their external costs arise in consumption; production by-products like smoke are not themselves a good or service.

False.

The welfare loss triangle represents a loss to society from the resources allocated to the over-provision or over-consumption.

Governments can use indirect taxes, legislation and regulation to make the market more socially efficient.

Positive externalities of production are external benefits created during the production of a good or service, causing under-provision because only private benefits are considered.

It under-provides because producers consider only their private benefits, ignoring the external benefits enjoyed by third parties.

Honey production increases the number of bees in an area, boosting pollination and helping other food producers nearby.

The free market under-provides a good with a positive production externality by an amount equal to Qopt - Qe.

False.

Positive externalities cause under-provision or under-consumption, because external benefits are ignored.

Positive externalities of consumption are external benefits created during the consumption of a good or service, causing under-consumption because only private benefits are considered.

Vaccinations protect those who receive them and also prevent the spread of disease to others around them.

At the free-market equilibrium marginal private benefit (MPB) equals marginal social cost (MSC).

True.

The external benefits of consumption mean marginal social benefit (MSB) exceeds marginal private benefit (MPB).

Merit goods are beneficial to society but under-consumed because consumers do not fully recognise their private or external benefits.

Governments often subsidise merit goods to lower their price and increase the quantity demanded.

When an externality is on the consumer side of the market, the diagram will show two demand curves.

Common pool resources are resources that are non-excludable but rivalrous in consumption.

Non-excludable means anyone can access a resource without having to pay for it, usually because no one owns it.

Rivalrous means a resource can be used up, so one person's use reduces the opportunity for others to use it.

The tragedy of the commons, explained by Garrett Hardin in 1968, occurs when common pool resources are used in production in an unsustainable way.

Examples include ocean fishing, communal grazing land, rivers and natural forests or rainforests.

False.

Common pool resources are non-excludable but rivalrous, which is what makes them prone to over-use.

The unsustainable use of common pool resources creates negative externalities of production.

The Darién Gap in Panama, where illegal logging is depleting a shared rainforest, illustrates the tragedy of the commons.

They have tried collective self-governance, appealing for legal ownership rights, and calling for enforceable international agreements.

True.

With legal ownership rights, illegal logging becomes theft, allowing the tribes to prosecute those involved.

They are only effective if all countries sign up and enforcement agencies are active and free from corruption.

External costs from the unsustainable use of common pool resources include pollution, environmental damage and resource depletion.

A Pigouvian tax is a tax placed on a product with harmful side effects to increase its price and reduce the quantity demanded or supply.

It reflects the polluter pays principle, making the individual or firm causing the externality pay for it.

An indirect tax can be either ad valorem or specific.

A carbon tax is a tax on producers who emit greenhouse gases, setting a price per ton of CO2 emissions and raising their costs of production.

It encourages firms to invest in pollution abatement technology, which goes ahead if the technology costs less than the tax.

A producer subsidy is a fixed amount of money per unit the government gives firms to lower production costs and/or increase output.

Subsidies distort the allocation of resources, for example creating excess supply in agricultural markets, and carry an opportunity cost.

Collective self-governance occurs when communities come together to take control of common pool resources to deal with the negative externalities of their use.

Firms buy a permit to pollute when required, raising their costs, and can sell any permits they no longer need to other firms.

It depends on the price elasticity of demand (PED), as inelastic demand means consumers keep buying despite higher prices.

False.

With inelastic demand, consumers largely continue buying the good, so the reduction in quantity demanded is small.

The government creates laws to limit external costs and sets up regulatory agencies to enforce and monitor them.

True.

Regulation may push activity into underground (illegal) markets that could generate even higher external costs on society.

It raises awareness of the external benefits or costs of a good, changing the marginal private benefit and shifting demand.

Educating consumers on the external benefits of merit goods shifts the demand curve to the right.

It takes a long time to change behaviour, and there is an opportunity cost attached to the government spending.

Tradable pollution permits allow firms to emit pollution up to a limit, with firms that pollute more buying additional permits from less-polluting firms.

It is also known as a Cap and Trade Scheme (CATs).

The price of a pollution permit represents an additional cost of production, which reduces supply.

If additional permits cost more than pollution abatement technology, firms switch to cleaner technology and sell their spare permits for revenue.

True.

Larger firms have the resources to buy up all the permits while smaller firms struggle, which can create monopolies over time.

International agreements aim to address negative externalities of production and consumption that are global in nature and need a co-ordinated response.

MEDCs developed using 'dirty technologies', so limiting these could unrealistically slow the economic growth of LEDCs.

There are usually no legal consequences for withdrawing, and new governments may change or withdraw from them.

Collective self-governance occurs when the stakeholders in a community work together to combat the negative externalities associated with common pool resources.

It works best when private property ownership rights for the natural resources are given to the communities.

False.

Taking back control of resources from multinationals or organised crime can be highly confrontational or violent.

Government provision is where the government directly provides merit goods and public goods that would otherwise be under-provided by the free market.

Private firms do not provide them because of the free rider problem, which makes it hard to profit from them.

Government-provided goods are usually free at the point of consumption but are paid for through general taxation.

Goods that are free may cause excess demand and long waiting times, and there is an opportunity cost to their provision.