AS Micro Revision on Externalities

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AS Micro Revision on Externalities

  1. 1. AS MicroExternalities and Market Failure
  2. 2. What is market failure?• Market failure - where resources are inefficiently allocated due to imperfections in the working of the market mechanism i.e. – Externalities – Merit goods / demerit goods – Information failures – Public goods – Monopolies – Factor immobility – Inequalities in the distribution of income and wealth.• When there is a clear economic case for government intervention in markets where some form of market failure is taking place
  3. 3. Externalities• Externalities are third party (spill-over) effects arising from production and consumption of goods and services for which no appropriate compensation is paid• Externalities cause market failure if the price mechanism does not take account of the social costs and benefits of production and consumption• Externalities can be positive or negative
  4. 4. Negative production externalities and negative consumption activitiesCosts and Benefits Marginal private cost (MPC) S Marginal private and social benefits T Output
  5. 5. Negative production externalities and negative consumption activities Marginal social costCosts and (MSC) Benefits Marginal private cost (MPC) V S Marginal private and social benefits U T Output
  6. 6. Negative production externalities and negative consumption activities Marginal social costCosts and (MSC) Benefits W Marginal private Y cost (MPC) V Loss of Social S Z Welfare due to market failure Marginal private and social benefits U T Output
  7. 7. Positive consumption externalitiesCosts and Benefits Marginal private cost and social cost A Marginal private benefit B Output
  8. 8. Positive consumption externalitiesCosts and Benefits Marginal private C cost and social cost A Marginal social benefit Marginal private benefit B D Output
  9. 9. Positive consumption externalities Loss of Social Welfare due toCosts and market failure Benefits Marginal private C cost and social cost A Marginal social benefit Marginal private benefit B D Output
  10. 10. Renewable Energy & Solar Subsidies
  11. 11. Using cross-elasticity ofdemand, assess the likelyrelationship between thedemand for solar panelsand the price ofhousehold electricityfrom non-renewablesources
  12. 12. Rising electricity prices Incentives to switch torenewable energyThere is a cost to switching Rising marketdemand for solar panels
  13. 13. Despite a strong rise in demand, the market price of solar panelshas fallen in recent years. With the help of a supply and demanddiagram, explain why this can have happened Price of solar S1 panels P1 D1 Q1 Quantity
  14. 14. Despite a strong rise in demand, the market price of solar panelshas fallen in recent years. With the help of a supply and demanddiagram, explain why this can have happenedPrice of solar S1panels P1 D1 D1 Q1 Quantity
  15. 15. Despite a strong rise in demand, the market price of solar panelshas fallen in recent years. With the help of a supply and demanddiagram, explain why this can have happenedPrice of solar S1panels P2 P1 D2 D1 Q1 Quantity
  16. 16. Despite a strong rise in demand, the market price of solar panelshas fallen in recent years. With the help of a supply and demanddiagram, explain why this can have happenedPrice of solar S1panels P2 P1 S2 D2 D1 Q1 Quantity
  17. 17. Despite a strong rise in demand, the market price of solar panelshas fallen in recent years. With the help of a supply and demanddiagram, explain why this can have happenedPrice of solar S1panels P2 P1 S2 P3 D2 D1 Q1 Quantity
  18. 18. Despite a strong rise in demand, the market price of solar panelshas fallen in recent years. With the help of a supply and demanddiagram, explain why this can have happenedPrice of solar S1panels P2 P1 S2 P3 D2 D1 Q1 Q2
  19. 19. Evaluate the argument for government intervention in themarket for solar panels to encourage the growth of renewable energy rather than allowing free market forces to operate
  20. 20. The case for solar subsidies Promotes renewable energy and lowers oil dependency Creates thousands of new jobs – + a positive multiplier effect Cuts bills for consumers & councils Economies of scale if the take-up of panels increases
  21. 21. Solar subsidies – critical evaluation Subsidies benefit richer households Limited effectiveness for money spent – opportunity cost Mis-selling of solar panels especially to vulnerable households Most solar panels are imported

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