internalising externalities
DESCRIPTION
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 $. - PowerPoint PPT PresentationTRANSCRIPT
To internalise an externlaitiy is to ensure that private costs (or benefits) equal social costs or benefits)
This may involve govt intervention
Cost
Benefit
Price
$
MC
MSC
MB
Pm
Ps
QmQs
Spill over cost
Dead Weight Loss
It is efficient to produce additional units of output as long as the benefit ≥ cost of producing them
The efficient output level is obtained at the point where MSC=MB
For every unit produced over the efficient level QS, the costs to society > benefits. That is why we have DWL.
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
Q
Cost
Benefit
Price
$
MSC
MC
MB
Pm
Ps
Qm Qs
Spill over benefit
Dead Weight Loss
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.
Subsidy Level
Q
Cost
Benefit
Price
$
MC
MSB
MB
QmQs
Pm
Ps
Spill over cost
Dead Weight Loss
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
Tax level
Q
Cost
Benefit
Price
$
MC
MB
MSB
Qm Qs
Pm
Ps
Spill over benefit
Dead Weight Loss
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
Externalities occur when property rights are unclear
Property rights give exclusive rights to use and disposal of property to those who own the property.
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.
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
Each fisher ignores these negative externalities, resulting in the seas being over fished and leading to market failure.
