Unit 2.5 MARKET FAILURE - EXTERNALITIES PDF

MARKET FAILURE: EXTERNALITIES CAN GOVERNMENT INTERVENTION HELP TO IMPROVE ECONOMIC WELL BEING?  When should governments intervene in a free market? Today’s Question: Can you list any goods or services that you consume that have an unintended effect on another person (that isn’t the produce...

MARKET FAILURE: EXTERNALITIES CAN GOVERNMENT INTERVENTION HELP TO IMPROVE ECONOMIC WELL BEING?  When should governments intervene in a free market? Today’s Question: Can you list any goods or services that you consume that have an unintended effect on another person (that isn’t the producer)? Give some examples. This week’s goals: Explain the difference between positive and negative externalities. Explain the concept of marginal benefit. Topics and Activities: Positive externalities of consumption/production. Re-thinking the demand curve. What does the demand curve represent? What the consumer is willing and able to pay at every price. Re-thinking the demand curve. What does the demand curve represent? MARGINAL - For each additional unit of PRIVATE - What the consumer (and only the consumer) experiences BENEFIT - Gains. Externalities of Consumption Merit goods - goods or services with positive externalities. Merit goods would be under-provided by the market and so under-consumed. Demerit goods - goods or services with negative externalities. Merit goods would be under-provided by the market and so under-consumed. Positive externalities of consumption - benefits enjoyed by a third-party when a consumer makes a purchasing decision. Negative externalities of consumption - costs a third-party must bear when a consumer makes a purchasing decision. Marginal private benefit - the private benefit (utility) enjoyed by a household (or business) in actually consuming (or producing) a good. Marginal social benefit − this is equal to marginal private benefit (MPB) + the externalities of consumption or production. POSITIVE EXTERNALITIES of CONSUMPTION MPBMSB  When should governments intervene in a free market? Homework: Read Kognity 2.8.0 - 2.8.5 Test Corrections - MANDATORY One more essay question for Paper 1, complete.  When should governments intervene in a free market? Today’s Question: Can you list any goods or services that you produce that have an unintended effect on another person (that isn’t the producer)? Give some examples. This week’s goals: Explain the difference between positive and negative externalities. Compare and contrast market outcomes for positive and negative externalities. Topics and Activities: Positive externalities of consumption/production. POSITIVE EXTERNALITIES of Production MPC>MSC NEGATIVE EXTERNALITIES of Production MPC This is the main part of your presentation. One slide with the final decision about what policy to implement. Be convincing!  GOVERNMENT RESPONSES to Externalities What kind of response would be appropriate PRESENTATIONS to internalize/correct the externality? Explain. Summary of article. 1) Market Based Strategies (Extending DRAW a diagram to show the market failure. Property Rights, Advertising, Taxes and Subsidies, Tradable Permits) EXPLAIN the diagram. 2) Government Based Strategies EVALUATE (weigh the different) policies (using diagrams and arguments-thinking about (Legislation, Direct Provision) different stakeholders 3) Coase Theorem (Negotiation) One slide with the final decision about what policy to implement  EXTERNALITY PRACTICE CASES E-Cigarettes Include the appropriate diagram and explain if this is an overallocation or underallocation of resources. Which of the following is true? MPB>MSB MPBMSC MPCMSB MPBMSC MPCMSB MPBMSC MPCMSB MPBMSC MPC