1 / 13

Internalising Externalities

Internalising Externalities. Internalising Externalities. To internalise an externlaitiy is to ensure that private costs (or benefits) equal social costs or benefits) This may involve govt intervention. Negative externality of production. MSC. Cost Benefit Price $.

alva
Download Presentation

Internalising Externalities

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Internalising Externalities

  2. Internalising Externalities • To internalise an externlaitiy is to ensure that private costs (or benefits) equal social costs or benefits) • This may involve govt intervention

  3. Negative externality of production MSC Cost Benefit Price $ The efficient output level is obtained at the point where MSC=MB MC Ps It is efficient to produce additional units of output as long as the benefit ≥ cost of producing them Pm MB Qm Qs For every unit produced over the efficient level QS, the costs to society > benefits. That is why we have DWL. Spill over cost Dead Weight Loss

  4. Interventions • Producers need to bear the full costs of production (notes) • This involves reducing output so that the spill over's are diminished and market equilibrium moves towards the social equilibrium • Two ways to internalise (notes) • 1. The govt can intervene by imposing a tax e.g carbon tax. Will shift the supply curve left so that private costs=social costs. • 2. Regulations that limit or ban pollution can be put in place. Any breach of regulation will involve a fine that impose additional costs on the producer these then affect the market in the same way as taxes

  5. Positive Externalities of Production • Interventions to internalise the externality • Involve the producer being compensated for the savings in costs other producers have received. • Therefore enabling an increase in output and move the market to where MSC=MB • Two ways the government can internalise the externality • Paying a subsidy. Will shift the supply curve right so that private costs =social costs • Regulations encouraged. e.g. tax write offs. MC Cost Benefit Price $ MSC Pm Ps Subsidy Level MB Q Qm Qs Spill over benefit Dead Weight Loss

  6. Negative Externalities of Consumption Cost Benefit Price $ • The social cost can be internalised if • The govt imposes a indirect tax • Will shift supply curve left. • Decrease level of output produced and consumed. • Increase price MC Ps Pm Tax level MB MSB Q Qm Qs Spill over cost Dead Weight Loss

  7. Positive Externalities of Consumption Cost Benefit Price $ MC • These benefits can be internalised if the government subsidies or in some way rewards the consumer. • e.g. providing the good free of charge – immunisation for children • This will shift the supply curve to the right • Increase output • Decrease price Pm Ps MSB MB Q Qs Qm Spill over benefit Dead Weight Loss

  8. Using the Market to correct the Externality • Externalities occur when property rights are unclear • Property rights give exclusive rights to use and disposal of property to those who own the property.

  9. Use of property rights • Where property rights can be established clearly the efficient allocation of resources is relatively straight forward. • The owner has the right to • use the resource • Prevent others from using it • Can encourage the conversation of the resource so it will provide an income in the future.

  10. What happens when we do not have Property Rights?

  11. The Tragedy of the commons • In many parts of the world, fishing exploits a common property resource that has no definable private property rights. • Open access to this resource can lead to overfishing and depletion of fish stocks • Imposes a negative externality of production on the other fishers because the fish become harder and more costly to catch

  12. Tragedy of the commons • Each fisher ignores these negative externalities, resulting in the seas being over fished and leading to market failure.

  13. Resource management and Sustainable exploitation page 215

More Related