Archive for the ‘Section 2: Microeconomics’ Category
Portfolio: Semester 2
Posted on: May 30, 2011
- Definitions — Microeconomics, Macroeconomics
- Evaluation — China’s Inflation: IA Practice
- Collaboration — The Best Economies around the World
- Reflection 1 — “Explain” Question Reflection
- Reflection 2 — President’s Dilemma: Reflection
- Improvement — Minimum Pricing on Alcohol
- Showcase — Costa Rica: Too Much Government Spending
Minimum Pricing on Alcohol
Posted on: February 19, 2011
According to the article “Report backs minimum drink prices” from BBC news, the government of Scotland is planning to set a price floor on alcohol. This plan is introduced due to negative externality of alcohol consumption; the third party is suffering from the bad effects, such as violence on streets and increasing health problems, caused by consumption of alcohol.
(Figure 1) Negative externality of alcohol consumption
As shown in figure 1, the Marginal Private Benefit (MPB) is higher than the Marginal Social Benefit (MSB). This means that the over-consumption of alcohol is harmful to others who do not consume alcohol as much. Thus, welfare loss is created (illustrated as the shaded area). To internalize this externality, the quantity should be decreased from Q to QOPT, and follows the change in price from P to POPT.
After conducting research, researchers at Sheffield University found out that “a price as low as £40 per unit could save hundreds of lives per year.” With this study in mind, the Scottish government is planning to set a minimum price per unit of alcohol.
(Figure 2) Price floor: minimum price per unit of alcohol
If the price floor is set, the products that contain alcohol would rise. As shown in figure 2, not only would the quantity of alcohol decrease from Q to Q1, the price of per unit of alcohol would rise from P to Pf. This would be added to the cost of companies that produce alcoholic drinks. With increase in the cost in producing their goods, the firms would raise the price of the product, decreasing the quantity demanded for alcohol.
The government believes that with this price floor, many lives would be saved, for it would “cut crime and improve quality of life.”
Text: “‘Clean coal’ and those pesky negative externalities”
1. Define the following terms: a) negative externality, b) welfare loss
a) Negative externality is spillover effect that has an impact on ‘outsiders’ that are disadvantageous to them and for which they receive no compensation. In this article, it is pollution.
b) Welfare loss occurs when the optimum outcome for society is not achieved. It happens when marginal social benefit does not equal marginal social cost, and thus is loss to society.
2. Using an appropriate diagram, explain why coal fired power stations produce a negative externality.
(Figure 1) Negative production externality of coal fired power station
3. Using an appropriate diagram, explain how government might intervene to overcome this example of market failure.
(Figure 2) Government intervention
4. Using information from the text and your knowledge of economics, evaluate the intervention you outlined in (c).
(Figure 3) Coal fired power stations
The stakeholders will be affected both negatively and positively when the government intervene to overcome the negative externality by taxing.
The local community will be affected positively when the coal fired power stations are taxed by the government. According to the article, “in the local area, there will likely be decreases in air quality” because the coal fired power stations will increase the level of local pollutants. When the coal fired power stations are taxed, the quantity of their products will decrease, as shown in figure 2. Therefore, with the decrease in the quantity of the coal fired power stations’ products, the local community will not be polluted as much.
However, the tax on the coal fired power stations will have negative consequence for the other communities. According to the article, the coal fired power stations “will reduce overall [CO2] emissions” and “reduce sulfur dioxide emissions” as well. Thus, when the coal fired power stations are taxed, the quantity of the power stations’ products will decreases, leading to less chance of decreasing the pollution in the other communities.
The owners of coal fired power stations are a group of people who would be affected negatively by the tax on coal fired power stations. When their products are taxed, their profit will decrease for the quantity demanded will decrease with higher price and they would have to pay the tax to the government.
Similarly, the laborers who work under the owners would be affected negatively as they may suffer from unemployment. Since the cost of producing the coal fired power stations’ products, the owners might be inclined to fire their laborers.
In conclusion, putting tax on the coal fired power stations would not be advocated by many of the stake holders. Thus, the employment of tax might not be the best solution in reducing pollution.
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