Practise calculating private, external and social costs or benefits, locating market and social optima and evaluating externalities and projects with welfare-loss and cost-benefit evidence.
In recent years, the fuel cost of operating a jet aircraft has declined. Over the same period, improved design has led to much quieter aircraft.
How would this affect the marginal private cost (MPC) and the marginal external cost (MEC) of air travel?
a downward shift of both the MPC and the MEC curves
a downward shift of the MPC curve and a movement left along the MEC curve
a movement left along both the MPC and the MEC curves
a movement left along the MPC curve and a downward shift of the MEC curve
A traffic study concluded that there would be significant benefits if 10% of car drivers switched to using motorcycles during peak traffic times.
Which benefit of this change would be considered a private benefit?
faster journeys for those who continued to go by car
faster journeys for those who switched to motorcycles
increased safety for cyclists
reduced levels of air pollution for pedestrians
A medical team provides vaccinations for children to prevent an outbreak of an infectious disease.
Why would this be described as a positive externality?
Additional benefit might be gained as the disease no longer spreads.
Any kind of medical help will improve the condition of the children.
No action would be taken unless the medical team intervened.
The social benefits of vaccination are less than the social costs.
Market Economies
From Adam Smith onwards, most economists have regarded competitive markets as the main mechanism of economic activity. They argue that the interaction between producers and consumers can lead to both allocative efficiency and productive efficiency.
It can, however, be questioned whether the market automatically produces the best solution. Sometimes there are significant reasons for governments to intervene in a market in order to produce a better outcome than market forces alone. These situations are market failures.
When producing goods and services firms consider the private costs they pay and private benefits they receive. For example, a steel producer accounts for the cost of iron ore, fuel, labour and administration. It offsets these costs against the revenue from selling the steel. However, those people who live near the steelworks suffer the consequences of the noise, dirt and polluted air generated as part of the production process. Similarly, in many areas the extraction of iron ore can lead to environmental destruction such as the degradation of ground water for domestic consumption and a reduction in the variety of wildlife and flowers.
Competitive markets as envisaged by economists, however, may not exist. Firms may integrate to gain the benefits of economies of scale, to realise their ambition to rule the market or to increase their market share. Such integration might lead to the development of a monopoly market structure. Many believe that a monopoly always operates against the interests of the consumer because of its lack of efficiency. As a result, governments often restrict the operation of monopolies.
Explain what is meant by a negative production externality.
Identify from the extract a negative production externality resulting from steel production.
Explain, with the aid of a diagram, the consequences for output and price if the steel market is required to take into consideration negative production externalities.
Global carbon emissions
A key message of the 2021 World Climate Summit was that the use of coal must be phased out for the good of the planet.
Content removed due to copyright restrictions.
Content removed due to copyright restrictions.
With the help of a marginal social cost and benefit diagram discuss whether the continued use of coal to produce electricity makes the achievement of allocative efficiency less likely.
What is the definition of moral hazard?
An increase in the likelihood of taking risks because another party is paying for these risks.
The loss of social welfare arising from the consumption of a good.
When buyers and sellers have different amounts of information regarding product quality.
When costs and benefits are taken into account when a decision is being made.
An economist undertakes a cost-benefit analysis of the pollution resulting from a manufacturing process.
Which outcome is most likely to guide any recommendation about the optimal level of manufacturing output?
that the marginal social cost of manufacturing equals the marginal social benefit
that the marginal cost of pollution is zero
that the total revenue of manufacturing equals the total cost
that the total benefit of pollution is maximised