MARKET FAILURE (3.4) Externalities

Transcription

1 1 Externalities

2 6 MARKET FAILURE (3.4) Jet skis may be fun to use but not everyone likes them... especially if you are swimming and get hit by one. Read the article excerpt alongside and answer the questions that follow. What should have been a family s fun day out turned into a nightmare when their 10-year-old boy was hit in the head by an out of control jet ski. April Why would the accident described in the excerpt above be classified as a negative externality of consumption?. List two other externalities of consumption from people jet-skiing. 3. Based on your answer to question (.), explain why the private market produces more or less jet skis than the socially desirable output level. 4. Rephrase your answer to question (3.) to include the idea of the allocation of scarce resources. Exercise.1 Externalities... Jet Skis P MARKET FOR JET SKIS ($) 5. a. On the graph to the right, draw a new curve that includes the externalities of jet-skiing. Label correctly. b. Show the social equilibrium ( S, P S 6. Suggest a practical solution that would internalise the spillover costs (externalities) associated with jet-skiing. 7. Relate the concept of property rights to the question of jet-skiing as it currently stands. Suggest who might be willing to buy the other s property rights... the jet skiers to ski or the public for the silence of no jet skis. P PR PR

3 7 Apples and other fruit are increasingly being promoted by the government to encourage healthy eating habits in the New Zealand population. Answer the following questions about externalities associated with eating apples. 1. Based on the graph to the left, what is the market (private) equilibrium price and quantity for apples. P ($) 3.00 MARKET FOR APPLES $ apples. Which curve reflects the private demand for apples and which shows society s demand for apples? private: social: S 3. Why are the two curves different? (000) MT 4. The graph above shows that there is what type of externality? 5. What is the social equilibrium and quantity? price: $ quantity: 6. Why would individual consumers not be willing to pay this price? 7. How could the government get private firms to supply more apples to reach the social equilibrium quantity? 8. Show your answer to question (7.) on the graph at the top of this page. 9. At this level of output... a. how much will producers receive for the apples they produce? $ b. how much will consumers pay for the apples? $ c. who pays the difference? Exercise. Social Marginal Benefits

4 8 MARKET FAILURE (3.4) Read the following article and answer the questions that follow. Young Drivers Targeted by Rise in Alcohol Tax Last night Parliament introduced a new alcohol tax aimed at reducing the youth drinking problem in New Zealand. The Customs and Excise Amendment Bill raised the excise duty on drinks that contain 14 to 3 percent alcohol. Mr Anderton told Parliament that the products that mainly fall into this category are the very cheap light spirits often drunk by young people... (because of)... the amount of bang they get for their buck. May What is an excise duty?. With reference to specific externalities of consumption, explain why the government chose to increase the excise duty on certain alcoholic beverages? 3. Will this new excise duty stop young people from getting drunk? Explain. Exercise.3 Externalities of Consumption 4. On the graph alongside, show the following: Private equilibrium price and output. Social equilibrium price and output. The imposition and effect of excise duty. The deadweight loss resulting from the tax. 5. Were alcoholic beverages over- or under-supplied? Explain. 6. On April 1st 008, the Government banned certain Ecstasy pills. Explain why the Government chose to ban party pills and yet only put a sales tax on alcohol. P ($) MARKET FOR ALCOHOLIC BEVERAGES

5 9 Imagine how you would feel if a large factory opened upstream of your farm or orchard and began polluting the water and air that comes to you. Read the resource below and answer the questions that follow. The map alongside shows a river flowing into a lake. Along the river are three farms and one mining company. A number of companies also use the lake to catch fish. The mining company discharges all its spill into the river, which flows downstream into the lake. The farmers use the river to irrigate their farms. The extra sediment blocks their hoses, which they must pay to get cleaned yearly. Farmers A and C use a certain insecticide to kill the pests on their farms. As a result, their crops are disease-free and sell for high prices at the market. Farmer B uses no insecticide as she feels it is environmentally unfriendly. As a result her crops are not as good quality and don t earn as much as those from Farms A and C. Farmer C The annual catch of the fishing firms on the lake have been falling due to the extra lead and also the insecticide used by Farms A and C. Mining Company Farmer A Farmer B 1. List the problems identified in the article above and who suffers the consequence. Problem: _ Victim: Problem: _ Victim: Problem: _ Victim:. Identify and describe three alternative solutions to the problems you have identified above. a. b. c. Exercise.4 Negative Externalities

6 30 MARKET FAILURE (3.4) Externalities... over- or under-priced? Complete the following summary sheet. 1. Positive Externalities of Consumption A positive externality of consumption is a benefit resulting from the consumption of a good or service, experienced by someone other than the person who pays for it. Add Social Marginal Benefit (S Show society s ideal level of output ( show the price society is willing to pay (P show the price individual consumers are willing to pay (P 3 1 To achieve a socially desirable level of output, society must get producers to the price paid by Exercise.5 Externalities of Consumption individual consumers to quantity demanded.. Negative Externalities of Consumption A negative externality of consumption is a cost resulting from the consumption of a good or service, experienced by someone other than the person who pays for it. Add Social Marginal Benefit (S Show society s ideal level of output ( show the price society is willing to pay (P show the price individual consumers are willing to pay (P 3 To achieve a socially desirable level of output, society must get producers to the price paid by individual consumers to quantity demanded. 1

7 31 3. Positive Externalities of Production A positive externality of production is a benefit resulting from the production of a good or service, experienced by someone other than the person who produces it. Add Social Marginal Cost (S Show society s ideal level of output ( show the price society is willing to pay (P 3 show the cost to individual firms of producing (P 1 To achieve a socially desirable level of output, society must individual firm s marginal cost of production and so quantity supplied. 4. Negative Externalities of Production A negative externality of production is a cost resulting from the production of a good or service, experienced by someone other than the person who produces it. Add Social Marginal Cost (S Show society s ideal level of output ( show the price society is willing to pay (P 3 show the cost to individual firms of producing this level of output (P To achieve a socially desirable level of output, society must individual firm s marginal cost of production and so quantity supplied. 1 Exercise.6 Externalities of Consumption