Unit 2.8 - Market Failure: Externalities and Common Pool or Common Access Resources
What you need to know and understand:
Key concepts:
Concepts to understand:
- Socially optimum output: marginal social benefit (MSB) equals marginal social cost (MSC).
- (MSB = MSC): allocative efficiency; social/community surplus maximized
- Positive externalities of production and consumption and welfare loss
- Merit goods
- Negative externalities of production and consumption and welfare loss
- Demerit goods
- Common pool resources
- Characteristics: Tragedy of commons, rivalrous but non-excludable
- Unsustainable production creating negative externalities
- Government intervention in response to externalities and common pool resources including:
- Indirect (Pigouvian) taxes
- Carbon taxes
- Legislation and regulation
- Education—awareness creation
- Tradable permits
- International agreements
- Collective self-governance
- Subsidies
- Government provision
- Strengths and limitations of government policies to correct externalities and approaches to managing common pool resources including:
- challenges involved in measurement of externalities
- degree of effectiveness
- consequences for stakeholders
- Importance of international cooperation
- Global nature of sustainability issues
- Challenges faced in international cooperation
- Monitoring, enforcement
Key concepts:
- Scarcity
- Choice
- Efficiency
- Equity
- Economic well-being
- Sustainability
- Change
- Interdependence
- Intervention
Concepts to understand:
- The market mechanism may result in socially undesirable outcomes that do not achieve efficiency, environmental sustainability and/or equity.
- Market failure, resulting in allocative inefficiency and welfare loss.
- Resource overuse, resulting in challenges to environmental sustainability.
- Inequity, resulting in inequalities.
- Governments have policy tools which can affect market outcomes, and government intervention is effective, to varying degrees, in different real-world markets.
TEXTBOOK unit 2.8
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