Problem: nobody pays the EC i.e. this is inefficient PC + EC = SC Problem: nobody pays the EC i.e. this is inefficient Solution: internalise the EC i.e. make the EC in to PC PC = SC

GOVERNMENT POLICY TOWARD EXTERNALITIES Command-and-Control Policies Usually take the form of regulations: Forbid certain behaviour. e.g. congestion charge in London Smoking bans in public places, age restrictions, marketing restrictions Market-Based Policies taxes enacted to correct the effects of a negative externality.

Taxation of negative externalities Designed to “make the polluter pay” for some of the external costs they cause Taxes will increase the costs of production - ie they internalise the externalities This should cause the producer to lower output Lower output should reduce the pollution Word to remember

Pollution and the Social Optimum to consider how externalities might be controlled Pollution and the Social Optimum Price Social cost Tax on pollution Demand (private value) Supply (private cost) Optimum QOPTIMUM Equilibrium QMARKET Quantity

Problems with taxes aimed at negative externalities Can we put a monetary value on pollution? Do we have all the information required to set tax at right level? Demand may be inelastic - Producers may pass on a tax to consumers Requires high taxes to have significant effect Low-income consumers may not be able to pay – regressive tax e.g. tax on cigarettes affects poor more than rich Higher taxes might cause inflation

Subsidies A payment that is made to encourage production Can be used to encourage production of products with positive externalities. Question Will shift supply – which way? Check - Diagram pg 95

Task Exam Style Question pg 97 – Q2 & Q3

Why Government intervention can Fail Show your understanding pg96 – internet research task