Negative Externalities
What is a negative externality?
A cost imposed by a third party (a bystander)
What is a Pigouvian tax?
A tax imposed on activities that create negative externalities to reduce their occurrence.
What are tradable pollution permits?
Government-issued permits that allow companies to emit a certain amount of pollution, which can be bought and sold.
What are public goods?
Goods that are non-rivalrous and non-excludable, meaning everyone can use them without reducing availability for others.
What are common resources?
Resources that are rivalrous but non-excludable, meaning they are accessible to all but can be depleted through overuse.
How do negative externalities affect market production levels?
Markets tend to overproduce goods with negative externalities because producers do not account for the external costs
How does a Pigouvian subsidy work?
It encourages positive externalities by reducing the cost of beneficial activities, increasing their consumption or production
How do market-based approaches differ from command-and-control regulations?
Market-based approaches use economic incentives, like taxes and permits, while command-and-control regulations mandate specific actions or limits.
Explain the free rider problem.
When individuals benefit from a good or service without contributing to its cost, leading to under-provision in the market.
Describe the tragedy of the commons.
When individuals overconsume a shared resource, leading to depletion and long-term harm to everyone.
Describe the deadweight loss in relation to negative externalities
Deadweight loss represents the inefficiency in the market where socially undesirable transactions occur because the social cost exceeds the social benefit.
Give an example of a Pigouvian tax and its purpose
A carbon tax, which aims to reduce greenhouse gas emissions by making pollution more costly
Why are market-based approaches often considered more efficient?
They allow firms flexibility in reducing pollution at the lowest cost rather than imposing uniform regulations.
Why do governments provide public goods?
Because the free market fails to provide them efficiently due to the free rider problem.
What solutions can address the tragedy of the commons?
Government regulations, property rights, permits, or community management strategies.
Why do markets tend to overproduce goods with negative externalities?
Producers only consider private costs and benefits, ignoring the external costs imposed on society.
Explain how Pigouvian taxes and subsidies align private incentives with social welfare
They adjust costs and benefits so that private decision-makers consider the broader impact of their actions, leading to a socially optimal outcome
Provide an example of a command-and-control regulation.
Requiring factories to install specific pollution control technology, such as scrubbers in smokestacks.
Provide an example of a public good and explain its characteristics.
National defense: it is non-excludable (everyone benefits regardless of contribution) and non-rivalrous (one person’s safety doesn’t reduce another’s).
Give an example of a common resource.
Fisheries, forests, clean air, or grazing land.
What is the social cost of a good with a negative externality compared to its private cost?
The social cost exceeds the private cost because it includes both private costs and external costs imposed on third parties
What is the main goal of implementing Pigouvian taxes?
To correct market failures by internalizing external costs and aligning private costs with social costs
What is the main advantage of using tradable pollution permits?
They create an economic incentive for companies to reduce pollution efficiently by allowing them to profit from selling unused permits.
How can a public good become a common resource?
If overuse leads to congestion or depletion, such as free public transportation becoming overcrowded.
How does overuse of common resources affect sustainability?
It depletes resources faster than they can replenish, leading to long-term scarcity and environmental damage.