| Front | Back | | --- | --- | | A government imposes a Pigouvian tax on a firm equal to the size of its negative production externality. Predict the effect on (a) the firm's marginal private cost (MPC) curve, and (b) the equilibrium quantity. |

(a) MPC curve shifts upwards to align with the MSC curve.
(b) Equilibrium quantity decreases from $Q_m$ to the socially optimum level ($Q_{opt}$).

| | A carbon tax is imposed on fossil fuels, but firms can switch to cheaper alternative fuels that still pollute slightly. Predict the effect on the Marginal Social Cost (MSC) curve and the overall externality. |

MSC curve shifts downwards (from $MSC_1$ to $MSC_2$).
The externality is reduced but not fully corrected.

| | In a market for tradable emissions permits, industrial production in the economy rapidly expands. Predict the effect on (a) the demand for permits, and (b) the market price of permits. |

(a) Demand shifts to the right ($D_1 \rightarrow D_2$).
(b) Market price increases ($P_1 \rightarrow P_2$) due to perfectly inelastic supply.

| | A government subsidizes solar energy adoption for manufacturing firms currently emitting high levels of carbon. Predict the effect on the firms' marginal private cost (MPC) curve and the level of pollution. |

MPC curve shifts upwards/towards the MSC curve as firms transition to sustainable production.
Pollution levels decrease towards the socially optimal level ($Q_{opt}$).

| |

Based on Figure 1, what must the size of the Pigouvian tax be to fully correct the negative production externality and reach $Q_{opt}$?

| The tax must be equal to the size of the externality (the vertical distance between MPC and MSC). | |

In Figure 2, why does the Marginal Social Cost curve shift from $MSC_1$ to $MSC_2$ after the carbon tax is introduced?

| Firms switch to alternative energy sources that still pollute, but by a lower factor. | |

Based on Figure 3, why is the supply curve of tradable permits ($S_{tp}$) perfectly inelastic?

| The total quantity of permits is fixed by the government. | |

Based on Figure 4, how does government regulation (like emission standards) affect the MPC curve to correct the negative production externality?

| It shifts the MPC curve upwards closer to the MSC curve at the social optimal level. | | Tradable permits represent a market-based policy where the government sets a legal cap on emissions and issues permits that firms can buy or sell based on market forces. | Tradable permits represent a market-based policy where the government sets a legal cap on emissions and issues permits that firms can buy or sell based on market forces. | | Collective self-governance of common pool resources is highly difficult to implement for resources like oceans because they lack boundaries. | Collective self-governance of common pool resources is highly difficult to implement for resources like oceans because they lack boundaries. | | By imposing taxes or tradable permits, governments force producing firms to internalise the externality, which reduces their incentive to pollute. | By imposing taxes or tradable permits, governments force producing firms to internalise the externality, which reduces their incentive to pollute. | | What is the consequence if a government sets a Pigouvian tax at a level lower than the actual negative externality? | The MPC will move closer to MSC, but the externality will not be fully corrected, resulting in continued market failure. | | How do tradable permits financially incentivize a firm to reduce its pollution levels? |

Saves costs by avoiding the purchase of extra permits.
Generates revenue by selling spare permits to other firms.

| | Why does government regulation of negative externalities (like emission standards) carry a high opportunity cost? | The government must spend tax revenue on monitoring and supervision staff, which could have been spent on healthcare or education. | | What is the primary communication requirement for collective self-governance of a common pool resource to succeed? | There must be efficient cooperation and communication among all users of the resource. | | Why are international agreements like the Montreal Protocol necessary to resolve global externalities like ozone depletion? | Because the negative externalities are emitted by individual countries but the consequences are felt globally, requiring coordinated international action. | | Why might a government choose direct government provision of a good (like clean energy) rather than relying on market-based policies? | To ensure accessibility and directly correct the inefficiencies and externalities created by private firms. | | What specific environmental issue and substances did the Montreal Protocol (1987) target to correct a global market failure? | It targeted ozone depletion by phasing out ozone-depleting substances (ODS) like chlorofluorocarbons (CFCs) and halons. | | How did the Montreal Protocol apply equity principles to help developing countries transition away from ozone-depleting substances? | By providing financial aid and assistance (through the Multilateral Fund) to cover transition costs without placing undue burdens on their economies. | |

| P 1 | |

| D 1 | |

| Quantity | |

| Price | |

| Q tp | |

| S tradable permits | |

| Pc | |

| spillover | |

| shift | |

| Pp | |

| ($) | |

| cost |

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

IB Economics 2.8.2 Government Intervention in Response to Externalities and Common Pool Resources Flashcards

Flashcards for 2.8.2 Government Intervention in Response to Externalities and Common Pool Resources

Flashcards for 2.8.2 Government Intervention in Response to Externalities and Common Pool Resources - IB

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics