externalities

• What are positive externalities?

  Benefits of economic activities not reflected in the price
• How do positive externalities affect third parties?

  They create positive spillover effects on those not involved in the economic activity
• What are some examples of positive externalities?

  • Education
  • Transport
  • Smell of fresh bread from a bakery
  • Parks
  • Public libraries
  • Apple orchards supporting bee populations
  • Health care services
  • Free school meals
• What are consumption externalities?

  External benefits from freely available spaces like libraries and museums
• What is a key reason positive externalities arise in a free market?

  Goods and services providing external benefits are under-consumed
• What is the formula for calculating social benefit?

  Social benefit = Private benefits + External benefits
• Why are private benefits hard to estimate?

  Due to a lack of information, such as future salary from education
• What government policies can increase consumption and production of goods with positive externalities?

  • Laws and regulations (e.g., compulsory education)
  • Subsidies to producers and consumers
  • State provision funded by taxes (e.g., health, education)
  • Information and education campaigns (e.g., 5-a-day)
• How does state provision work as a policy to increase education consumption?

  • Funded by taxpayers
  • Opportunity cost involved
  • Potential dependency created
  • Quality may vary since it is free
  • Risk of brain drain
• What is the effect of subsidies on consumers of education?

  They increase access and reduce the inequality gap
• positive externalities diagram

  
• What is a potential downside of degree apprenticeships?

  They can be very expensive
• What are the pros and cons of advertising and information campaigns for education?

  Pros:

  • Raise awareness through TV adverts and posters

  Cons:

  • Very expensive marketing
• What is the purpose of regulation, such as changing the school leaving age to 18?

  To encourage more people to stay in education
• What are some potential drawbacks of increasing the school leaving age?

  It can lead to brain drain and waste resources for some individuals
• What are the costs associated with keeping people in education for longer?

  • Very costly for the government
  • Opportunity cost of resources
  • Potential waste of time for some individuals
• What are negative externalities?

  Negative externalities are costs of economic activities not reflected in the price.
• Who is affected by negative externalities?

  Third parties who are not involved in the economic activity are affected.
• What are some examples of negative production externalities?

  • Air pollution from factories
  • Pollution from fertilizers
  • Industrial waste
  • Noise pollution
  • Collapsing fish stocks
  • Methane emissions
• What are some examples of negative consumption externalities?

  • Vehicle pollution
  • Household waste
  • Noise pollution from neighbours
  • Air pollution from smokers
  • Traffic congestion
  • Gambling addiction
  • Litter from tourists
  • Spill-over costs from obesity
• Why do negative externalities arise?

  They arise when firms do not account for external costs in their production decisions.
• What is a private cost?

  A private cost is the direct cost of an economic activity paid by a consumer, firm, or government.
• How is the full cost to society calculated?

  The full cost to society is the sum of private costs and external costs.
• What happens in a free market regarding negative externalities?

  In a free market, firms over-produce because they ignore external costs, leading to market failure.
• What are the private and external costs of driving a car?

  Private costs:

  • Fuel and oil costs
  • Parking fees
  • Maintenance
  • Depreciation
  • Drive time
  • Insurance
  • Vehicle tax
  • Car washes

  
  

  External costs:

  • Carbon emissions
  • Air pollution
  • Congestion
  • Environmental cleanup
  • Wildlife impacts
  • Noise pollution
  • Accident costs
• What does the negative externality diagram illustrate?

  It shows that social costs are greater than private costs in a free market.
• What is the purpose of a pollution tax?

  A pollution tax aims to make the polluter pay for the external costs they create.
• negative externalities diagram

  
• How does a pollution tax affect demand?

  A pollution tax increases the marginal private cost, leading to a fall in demand.
• What is the UK Carbon Price Floor designed to do?

  It provides a stable carbon price signal to internalize externalities from fossil fuels.
• What was the starting price for the UK Carbon Price Floor in 2013?

  The starting price was £16/tCO2.
• What is the EU carbon emissions trading scheme?

  It is a cap-and-trade scheme that sets a decreasing cap for CO2 emissions and allows trading of emissions allowances.
• What are the advantages of a pollution tax?

  It internalizes the externality, raises tax revenue, and changes incentives to reduce pollution.
• What are the disadvantages of a pollution tax?

  It may not change behavior due to low price elasticity and could disproportionately affect lower-income families.
• What are some topical examples of externalities in transport?

  • Congestion externalities from vehicles
  • Noise and air pollution from aircraft
  • Damage to sea bed from freight containers
  • Expansion of electric car ownership
  • Growth of car sharing apps
  • Investment in light rail infrastructure
• What are some problems with environmental taxes?

  Assigning the right level of taxation and consumer welfare effects are significant challenges.
• What is a command and control approach in regulating emissions?

  It involves setting maximum CO2 emissions per km travelled with penalties for exceeding limits.
• What are some examples of government regulations to address externalities?

  • Health and safety at work act
  • Renewables obligation certificates
  • By-laws preventing public consumption of alcohol
  • Consumer protection legislation
  • Ban on smoking in public areas
  • EU directives on disposal of durables
  • Tough rules on carbon emissions from vehicles
  • Speed limits and weight limits for lorries
  • Fishing quotas in EU waters
  • Bans on sale of certain substances
  • Lowering alcohol limit for drivers
• What are the challenges in evaluating the theory of negative externalities?

  Imperfect knowledge and difficulty in quantifying external costs complicate evaluations.
• Why is it difficult to measure external costs?

  External costs are difficult to measure because they often lack a clear monetary value.