Week 7 : Market Failures & the Environment
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Week 7 : Market Failures & the Environment

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Questions and Answers

What is referred to as a negative externality?

  • Well-kept garden
  • Pollution caused by manufacturing (correct)
  • Benefits from beekeeping
  • Improved public parks

    • Adverse selection pertains to hidden actions rather than hidden information.

    False

    What are two methods to equalize information in markets?

    Screening and signalling

    When individuals cannot internalise the effects of an externality, a(n) ______ market fails to exist.

    <p>essential</p> Signup and view all the answers

    Match the following types of externalities with their examples:

    <p>Negative Production = Pollution from steel manufacturing Negative Consumption = Car exhaust fumes Positive Production = Well-kept garden Positive Consumption = Beekeeping</p> Signup and view all the answers

    Which of the following is a characteristic of public goods?

    <p>Non-rival and non-excludable</p> Signup and view all the answers

    Market failures are always due to externalities.

    <p>False</p> Signup and view all the answers

    What is the free-rider problem in the context of public goods?

    <p>The free-rider problem is when individuals can consume a good without paying for it, leading to insufficient incentive to contribute to the provision of that good.</p> Signup and view all the answers

    A good that allows individual consumption without excluding others is called a __________.

    <p>public good</p> Signup and view all the answers

    Match the types of market failure with their descriptions:

    <p>Public goods = Cannot exclude individuals from consumption Externalities = Positive or negative effects on third parties Information failures = Asymmetry of information between buyers and sellers Market power = Ability of a firm to influence prices</p> Signup and view all the answers

    Which solution is NOT an option to deal with public goods?

    <p>Government regulation</p> Signup and view all the answers

    Competitive markets always result in efficient resource allocation.

    <p>False</p> Signup and view all the answers

    Name one source of market failure.

    <p>Public goods, externalities, information failures, or market power.</p> Signup and view all the answers

    What is the purpose of Pigouvian taxes?

    <p>To tax the level of pollution</p> Signup and view all the answers

    Cap-and-trade permits allow firms to transfer the rights to pollute voluntarily.

    <p>True</p> Signup and view all the answers

    What significant action is called for by the UN Climate Review to limit warming to 1.5 degrees Celsius?

    <p>Slash global emissions by 43 percent by 2030.</p> Signup and view all the answers

    The current charge for carbon tax in Ireland is €______ per tonne.

    <p>56</p> Signup and view all the answers

    Which sector contributes 25 percent of global emissions?

    <p>Industry</p> Signup and view all the answers

    Match the following terms with their descriptions:

    <p>Carbon Tax = Tax targeting carbon dioxide emissions Cap-and-Trade = Market for pollution rights Regulations = Limits on acceptable pollution levels Voluntary Agreements = Encouragement for eco-friendly measures</p> Signup and view all the answers

    Carbon taxes are typically progressive in their impact on different income groups.

    <p>False</p> Signup and view all the answers

    What is needed for decarbonisation according to the report?

    <p>A radical decarbonisation of all sectors of the economy.</p> Signup and view all the answers

    What do negative externalities lead to in markets?

    <p>Overproduction of goods than is socially desirable</p> Signup and view all the answers

    Positive externalities lead markets to produce a larger quantity than is socially desirable.

    <p>False</p> Signup and view all the answers

    What is an example of a negative externality?

    <p>Pollution from an aluminium factory</p> Signup and view all the answers

    The socially optimal output level is _____ than the market equilibrium quantity.

    <p>less</p> Signup and view all the answers

    Match the concept to its description:

    <p>Negative Externality = Costs that affect others not involved in a transaction Property Rights = Legal rights to control and benefit from a resource Coase Theorem = Efficient outcomes can be achieved through trading externalities Free-Rider Problem = Incentive issues when people cannot be excluded from using a good</p> Signup and view all the answers

    What happens when property rights are assigned regarding external costs?

    <p>They internalise an externality</p> Signup and view all the answers

    Without government intervention, producers will always produce the socially optimal quantity.

    <p>False</p> Signup and view all the answers

    What is deadweight loss?

    <p>A loss of economic efficiency when the equilibrium outcome is not achievable.</p> Signup and view all the answers

    The intersection of the demand curve and the _____ curve determines the optimal output level.

    <p>social-cost</p> Signup and view all the answers

    Which of the following is NOT a challenge in addressing negative externalities?

    <p>Assigning property rights is simple</p> Signup and view all the answers

    What is Ireland legally bound to achieve by 2050?

    <p>Carbon neutrality</p> Signup and view all the answers

    Ireland's GHG emissions are projected to be reduced by 51% by 2030 based on current plans.

    <p>False</p> Signup and view all the answers

    What is a key strategy mentioned for achieving climate targets?

    <p>Coordination of policies and strategies</p> Signup and view all the answers

    Ireland is aiming for a _______ reduction in GHG emissions by 2030 compared to 2018 levels.

    <p>51%</p> Signup and view all the answers

    What is an example of a positive externality?

    <p>Education leading to improved productivity</p> Signup and view all the answers

    Without intervention, the quantity produced or consumed is _______ at the market equilibrium.

    <p>Q1</p> Signup and view all the answers

    Match the following concepts with their definitions:

    <p>Carbon neutrality = Achieving net-zero carbon emissions Positive externality = A benefit that affects a third party Market equilibrium = The point where supply equals demand GHG emissions = Greenhouse gases released into the atmosphere</p> Signup and view all the answers

    What issue arises when private markets produce less than is socially desirable?

    <p>Market failure</p> Signup and view all the answers

    Study Notes

    Competitive Markets

    • Competitive markets usually lead to efficient resource allocation, maximizing surplus.
    • This model led to the conclusion that firms should compete, encouraging policies like deregulation and competition policy.

    Market Failure

    • Imperfect competition violates the assumptions of perfect competition, leading to inefficiency.
    • Market failures happen due to public goods, externalities, information failures, and market power.
    • Different failures can be interrelated.

    Public Goods

    • Public goods are non-rival (one consumer doesn't affect another) and non-excludable (impossible to prevent consumption by non-payers).
    • Suffer from the free-rider problem, where individuals don't pay for goods they can consume for free.
    • Pure public goods have both non-rivalry and non-excludability, while private goods have neither.

    Dealing with Public Goods

    • Solutions include public production, public financing of private production, and voluntary cooperation, which can be effective in smaller groups.
    • Technological advancements allow private market solutions for some public goods, e.g., cable TV.

    Information Failures

    • Asymmetry of information leads to opportunism, where the more informed party exploits the less informed.
    • Two types of opportunistic behavior: adverse selection (hidden information) and moral hazard (hidden actions).

    Addressing Information Failures

    • Solutions include equalizing information through screening, signaling, third party comparisons, and standards/certifications.
    • Restrictions on opportunistic behavior are achieved through regulations like mandatory insurance or product liability laws.

    Externalities

    • Externalities occur when actions of individuals/firms impact others, but these external costs/benefits are not reflected in their transactions.
    • Negative externalities negatively impact bystanders, while positive externalities have beneficial effects.
    • They are similar to public goods, being non-rival and non-excludable, making private transactions impossible and requiring government intervention.

    Types of Externalities

    • Negative Production: e.g., pollution from steel production.
    • Negative Consumption: e.g., smoking or loud parties.
    • Positive Production: e.g., beekeeping or well-kept gardens.
    • Positive Consumption: e.g., vaccinations or education.

    Key Message About Externalities

    • Negative externalities lead to overproduction, while positive externalities lead to underproduction.

    Negative Externalities Example: Pollution

    • Pollution from an aluminum factory is a negative externality.
    • The cost to society of producing aluminum includes private costs and external costs for pollution.
    • Without intervention, overproduction occurs with a social welfare loss.

    Negative Externalities and Property Rights

    • In the absence of property rights, managing external costs is difficult.
    • Property rights internalize externalities by providing a right to compensation for externalities.
    • The Coase theorem suggests that efficient outcomes are possible through market trading of externalities, regardless of initial property rights allocation.

    Challenges in Assigning Property Rights

    • Creating markets for assigning property rights is costly and suffers from the free-rider problem.

    Solutions for Negative Externalities

    • Pigouvian taxes: tax pollution levels.
    • Cap-and-trade permits: allow transfer of pollution rights, creating a market.
    • Regulations: emission standards and technology standards.
    • Voluntary agreements: encourage environmentally-friendly measures.

    Carbon Taxes

    • Carbon taxes are considered important tools to internalize the externality of carbon emissions.
    • Ireland introduced a carbon tax in 2010, currently €56 per tonne, expected to reach €100 by 2030.
    • Carbon taxes have a regressive impact, hurting poorer people more.
    • They also target carbon dioxide and not other carbon compounds like methane.

    Climate Change

    • Global temperatures are increasing, rainfall is rising, and extreme weather events are becoming more frequent.

    Paris Agreement

    • Established a process to stabilize greenhouse gas (GHG) concentrations to avoid dangerous climate change.

    UN Climate Review (September 2023)

    • Global emissions must be reduced by 43% by 2030 to limit warming to 1.5 degrees Celsius.
    • Requires phasing out unabated fossil fuels and “radical decarbonisation” of all sectors.

    Ireland's Climate Targets

    • Ireland is legally bound to achieve carbon neutrality by 2050 and to stay within three sequential carbon budgets between 2021 and 2035.
    • Requires a 51% reduction in GHG emissions by 2030 compared to 2018 levels.

    Challenges in Meeting Climate Targets

    • Existing plans project only a 29% reduction in emissions by 2030, failing to meet targets.
    • Projections show that all sectors are likely to exceed carbon budgets.

    Strategies for Addressing Emissions

    • There is no single solution, requiring a mix of approaches across sectors with coordinated policies.
    • Transparency and communication are crucial for building trust and influencing behavior.

    Positive Externalities

    • Education provides a positive externality, leading to improved productivity and economic growth.
    • If tuition fees are too high, markets may underproduce education.
    • The social benefit exceeds the private benefit due to positive externalities.

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    OCR EC4101 Topic 6: Market Failures & Environment PDF

    Description

    Explore the concepts of competitive markets, market failure, and public goods in this quiz. Examine how these economic principles influence resource allocation and efficiency. Test your knowledge on the solutions to public goods challenges and the implications of market power.

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