2. 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

3. 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.

4. 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

5. 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

6. 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

7. 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

8. Task
Exam Style Question pg 97 – Q2 & Q3

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