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Negative Externalitites (Production (External cost created by produers…

- - - - The loss resulting from negative consumption externalities. This is the reduction in benefits for society caused by the overallocation of resources. The welfare loss is determined by the difference between the MSB and MSC curve for the amount overproduced
      - In relation to consumer and producer surplus, at the market equilibrium, the social surplus minus the external costs = b + c + f – e (refer to diagram), while at the social optimum, b + c + f, therefore e is the welfare lost at market equilibrium
    - - The demand curve is split because MSB does not equal to MPB. Since there are external costs, these costs are negative benefits therefore they cause the MSB curve to lie BELOW the MPB curve
    - - Market based policies: Tax
        
        Indirect taxes
        
        Tax imposed on goods which results in an upward shift of the supply curve (leftward shift). The new curve should intersect MPB at optimum quantity.
        
        Tax on consumer
        
        Causes a downward shift in the demand (MPB) curve.
      - Government regulation
        
        Regulations used to prevent or limit consumer activities that causes negative consumer externalities.
      - Advertising
- - - - Market Based Policies
        
        Tradable Permits
        
        Also known as Cap and Trade schemes. Policy involving permits to pollute issued to firms by government/international body
        
        Tax
        
        Tend to equal to the external cost so that there is an upward shift in the supply curve
        
        Example; Carbon Tax. Tax on carbon emissions released by fossil fuels.
      - Government Regulations
        
        Deal with negative production externalities rely on the command approach. Used to prevent or reduce the effects of production externalities, and attempt to achieve one of the following
        
        Limit the emission of pollutants by setting a maximum level of pollutants permitted
        
        Limit the quantity of output produced by the polluting firm
        3.Require polluting firms to install technologies reducing the emissions
    - - Qopt, MSC > MSB, therefore it means society will be better off if it is less produced. Welfare loss is (Qm – Qopt)
      - Market equilibrium, producer surplus is f+g+h. External cost value is c+d+e+g+h. Total social benefits in market equilibrium are equal to consumer surplus plus producer surplus minus the external cost:
        (a + b + c + d) + (f + g + h) – (c + d + e + g + h) = a + b + f– e
- - - - Advantages
        
        Simple compared to market based solutions. Force polluting firms to comply, more effective.
      - Disadvantages
        
        Does not allow externality to be internalised. Regulations create no market-based incentives.
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      - Disadvantatages
    - - Advantages
      - Disadvantages