Understanding and Addressing Negative Production Externalities
School
Langara College**We aren't endorsed by this school
Course
ECON 105
Subject
Economics
Date
Dec 11, 2024
Pages
5
Uploaded by ChefGalaxy5640
Negative Production ExternalitiesNegative Externalities of ProductionWhen negative externalities of productionexist, as is the case with steel manufacturing, the free market allocates too many resources toward the production of the good.The free market equilibrium of Pe and Qe reflects an overproductionof steel because the negative externalities are ignored.Also, because producers and consumers are not required to account for the external costs, the free market price is too low.The vertical distance between MPC and MSC represents the marginal external cost.
Negative Production ExternalitiesNegative Externalities of ProductionMSC does notreflect a shift of the supply curve, but merely a more accurate representation of the full costs of production. Consider the MSC curve as the truesupply curve, because it shows all the costs to society (private costs + external costs).The socially optimaloutput would be at P* and Q* where MSC=MSB. The yellow area represents a deadweight lossdue to market inefficiency at the free market equilibrium.
Negative production externalities - SolutionsA Pigouvian Taxis a tax on any market activity that generates negative externalities, with the goal of correcting an undesirable or inefficient market outcome.The Taxis on the good that produces the externality. This is a specific tax, so it shifts the supply curve to the left (vertical distance equalling the tax).On the graph to the right, the tax covers most, but not all of the external cost, so there is still a small welfare loss remaining (shaded in red).
SolutionsNegative production externalities1.Enact laws to deter production of products or services that cause harm.2.Mandate the use of improved technology to allow for cleaner production.3.Legislate maximum allowable pollution levels with which companies must comply.These may shift MSC to the right, or MPC left.1.Costly to implement.2.Difficult to enforce.3.Determining the value of pollution losses is always challenging.4.There is an opportunity cost to using government resources in this way.Legislation and regulation
ExternalitiesNegative production externalities The Greed of FeedOne more real-world example of negative externalities of production (10:15).