2.8 Market failure - externalities and common pool or common access resourcesSyllabusFirst assessment 2022Topic2.8Level—
What you’ll learn6 learning objectivesChoose one objective for a focused lesson, or study the complete topic.2.8.1Socially optimum output• Social optimum occurs where marginal social benefit equals marginal social cost• Allocative efficiency maximizes social or community surplus• Diagram: allocative efficiencySyllabus objective2.8.2Externalities and welfare loss• Positive externalities of production or consumption create under-allocation without intervention• Negative externalities of production or consumption create over-allocation without intervention• Merit goods and demerit goods are linked to positive and negative externality cases• Diagram: market failure from negative production, negative consumption, positive production, and positive consumption externalitiesSyllabus objective2.8.3(HL)—Welfare loss calculation• Calculate welfare loss from an externality diagramSyllabus objective2.8.4Common pool resources• Common pool resources are rivalrous but non-excludable• The tragedy of the commons can cause unsustainable production and negative externalitiesSyllabus objective2.8.5Responses to externalities and common pool resource problems• Responses include Pigouvian taxes, carbon taxes, regulation, education, tradable permits, international agreements, collective self-governance, subsidies, and government provision• Diagram: government responses to externalities using Pigouvian taxes, carbon taxes, subsidies, legislation, regulation, and education• Diagram: carbon tax effects on a particular polluting industrySyllabus objective2.8.6Evaluating policy responses• Evaluation considers measurement challenges, policy effectiveness, and stakeholder consequences• International cooperation matters because sustainability issues are global• Monitoring and enforcement are major challenges in international cooperationSyllabus objective