2.8.5—Responses to externalities and common pool resource problems
- Syllabus
- First assessment 2022
- Objective
- 2.8.5
- Level
- HL
Policy responses must target the omitted social signal or commons rule
Responses include Pigouvian or carbon taxes, subsidies, legislation and regulation, education, tradable permits, international agreements, collective self-governance and government provision. Each changes prices, information, rights, quantities or governance differently.
A tax can move private cost toward social cost; a subsidy can encourage an external benefit; permits cap total pollution and allow trading; regulation sets limits; education changes information; provision supplies the beneficial output; commons governance creates monitored access and shared rules.
Match the instrument to whether the failure is an external cost, external benefit or open-access depletion. On a carbon-tax diagram, shift supply/MPC upward by the tax toward MSC, raising price and reducing polluting output toward the social optimum.
A fishery may combine a monitored community quota with an international agreement when stocks cross borders. A subsidy for vaccination targets under-consumption from external benefit, while a carbon tax targets excessive polluting production.
Property rights or quotas alone are not the complete syllabus response set. Every policy depends on measurement, enforcement and stakeholder legitimacy and may create equity or administrative costs.