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Understanding Externalities and Market Failure

The document outlines a problem set focused on externalities, market failure, and the impact of taxation on surplus and welfare. It includes questions on the definitions of negative and positive externalities, the distinction between private and social costs/benefits, and the role of government interventions like taxes and subsidies. Additionally, it asks for examples of external costs and benefits, and requires analysis of a specific tax on petrol and its effects on consumers and the oil industry.

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ronaldrideout1000
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3 views1 page

Understanding Externalities and Market Failure

The document outlines a problem set focused on externalities, market failure, and the impact of taxation on surplus and welfare. It includes questions on the definitions of negative and positive externalities, the distinction between private and social costs/benefits, and the role of government interventions like taxes and subsidies. Additionally, it asks for examples of external costs and benefits, and requires analysis of a specific tax on petrol and its effects on consumers and the oil industry.

Uploaded by

ronaldrideout1000
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Problem set 4

Question 1
a) Explain the concepts of negative externality and positive externality.
b) Using an appropriate example, explain the difference between a private cost and a social
cost and a private benefit and a social benefit.
c) In a supply-and-demand diagram, show producer and consumer surplus in the market
equilibrium.
d) Explain how tax paid by sellers and buyers affect the total surplus.
e) Explain, in words, what is deadweight loss (or welfare loss)

Question 2
In the lecture, we stated that government can enact tax or pay subsidy in order to internalise
externalities. Explain how these instruments can be used to address marekt failure.

Question 3
Give two examples of each of the following:
a) External costs of production
b) External benefits of production.
c) External costs of consumption
d) External benefits of consumption

Question 4
Use a supply-and-demand diagram to explain the concept of negative externality in production.
Why is private market equilibrium not optimal in the presence of negative externality in
production.

Question 5
The government decides to reduce air pollution by reducing the use of petrol. It imposes €0.50
tax for each litre of petrol sold.
a) Should it impose this tax on petrol companies or motorists? Explain carefully, using a
supply-and demand diagram.
b) Are consumers of petrol helped or hurt by this tax? Why?
c) Are workers in the oil industry helped or hurt by this tax? Why?
d) Show the deadweight (welfare) loss from the tax on petrol companies.

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