7.4 Private costs & benefits, externalities and social costs & benefits

Governments in many countries are promoting policies that reduce the impact of the negative externalities.

Evaluate, using appropriate diagram(s), the extent to which two policies used to reduce negative externalities can also improve allocative efficiency. [20]

Negative externalities of production cause market failure.

With the help of a diagram, assess the extent to which the introduction of indirect taxation is likely to address this cause of market failure. [20]

The use of air travels leads to market failure caused by negative externalities.

With the help of a diagram, assess the extent to which a government can intervene to correct this market failure. [20]

Explain what is meant by cost benefit analysis and consider how it might be used by a government to decide whether a new hospital should be built. [25]

a) Using diagrams, explain with examples the meaning of a positive externality for a consumer and a negative externality for a producer. [12]

b) Discuss the extent to which positive externalities and negative externalities explain all forms of market failure. [13]

a) Consider why it is important for a government to use cost benefit analysis when deciding how much of a public good to provide. [12]

a) Explain how the problems of climate change, such as global warming, may be regarded as a consequence of resource misallocation. [12]