Negative
Externalities·
Negative externalities
occur when the consumption or production of a good causes a harmful effect to a
third party.
Examples
of negative externalities·
If you play loud music
at night your neighbour may not be able to sleep.
·
If you produce
chemicals and cause pollution as a side effect, then local fishermen will not
be able to catch fish. This loss of income will be the negative externality.
·
If you drive a car, it
creates air pollution and contributes to congestion. These are both external
costs imposed on other people who live in the city.
·
If you build a new
road, the external cost is the loss of a beautiful landscape which people can
no longer enjoy.
Social
cost· ·
In a free market
people ignore the external costs to others, therefore output will be at Q1
(where Demand = Supply).
·
This is socially
inefficient because at Q1 – Social Cost > Social Benefit.
·
Social efficiency
occurs at Q2 where Social Cost = Social Benefit
The red triangle is
the area of dead weight welfare loss. It indicates the area of overconsumption
(where MSC is greater than MPC)Implications of
negative externalitiesIf goods or services
have negative externalities, then we will get market failure. This is because
individuals fail to take into account the costs to other people.To achieve a more
socially efficient outcome, the government could try tax the good with negative
externalities. This means that consumers pay the full social cost.Tax on
Negative ExternalityTaxes on negative
externalities are intended to make consumers / producers pay the full social
cost of the good. This reduces consumption and creates a more socially
efficient outcome.Without a tax, there
will be overconsumption (Q1 where D=S) because people ignore the external
costs. DISADVANTAGES of taxes·
Difficult to measure
the level of negative externality e.g. what is the cost of pollution from a
car?
·
If Demand is inelastic
then higher taxes will not reduce demand much
·
Taxes will cause
inequality
·
Cost of administration
·
Possibility of
evasion. E.g. with tax on disposing of rubbish there has been anincrease in fly
tipping (illegal Dumping of rubbish)
·
May be difficult to
decide who is causing pollution
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