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Externalities Worksheet Updated June 2018

The document is a worksheet that provides examples of products whose production or consumption results in externalities. For each product, it asks the user to identify whether the externality is negative or positive, who the affected third party is and explain it, explain the market failure in allocating resources, suggest a method of government intervention, draw a diagram showing how the intervention would impact the market, and explain the diagram. The first example of cigarettes is completed as a guide, identifying the externality as negative, the whole of society as the affected third party from second-hand smoke and additional healthcare costs, the overallocation of resources to cigarettes as the market failure, and a tax on cigarettes as the suggested intervention shown through a supply and demand

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28 views

Externalities Worksheet Updated June 2018

The document is a worksheet that provides examples of products whose production or consumption results in externalities. For each product, it asks the user to identify whether the externality is negative or positive, who the affected third party is and explain it, explain the market failure in allocating resources, suggest a method of government intervention, draw a diagram showing how the intervention would impact the market, and explain the diagram. The first example of cigarettes is completed as a guide, identifying the externality as negative, the whole of society as the affected third party from second-hand smoke and additional healthcare costs, the overallocation of resources to cigarettes as the market failure, and a tax on cigarettes as the suggested intervention shown through a supply and demand

Uploaded by

ummeyafreen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Externalities Worksheet Work in pairs or small groups to complete this worksheet.

complete this worksheet. There may be more than one method of government
intervention for many of the examples of products with externalities. The first example has been done for you.
Product Negative Who is the Explain the market Suggest a Draw a diagram to show how the suggested Explain the
whose or third party failure method of method of intervention might affect the market: diagram:
production or positive? affected? (misallocation of government
consumption Explain. resources): intervention that
results in could help solve
externalities: the market
failure.
The whole of There is an over- A tax on the The Market for Cigarettes Supply would
society is allocation of production of decrease,
Negative affected when resources towards cigarettes. equilibrium quantity
smokers cigarettes; and would decrease and
require potential additional price would rise.
additional resources used to A decrease in supply
healthcare provide healthcare (shift leftward,
funded by the when people possibly to zero
government. becomes sick as a quantity) will result in
Second-hand result of smoking or less resources being
Cigarettes smoke also second-hand smoke. allocated towards
impacts It would be a more cigarettes
negatively on efficient allocation of (equilibrium quantity
peoples’ health resources if less produced and traded
when people resources were has decreased)
smoke around allocated towards
them. producing cigarettes.

The community There is an under- Subsidy to price


is saved when allocation of consumers on P
people are resources, as more vaccines.
Price
Positive vaccinated as scarce resources are Sellers
receive
vaccines stop being used to
the disease manufacture Price

Vaccinations Subsidy
from spreading. products with more
negative impacts. Price
Consumers

The government
pay

needs to intervene.

Product Negative Who is the Explain the Suggest a Draw a diagram to show how the suggested Explain the
whose or third party misallocation of method of method of intervention would affect the market: diagram:
production or positive? affected? resources: government
consumption Explain. intervention that
results in could help solve
externalities: the market
failure.

Petrol (fuel)

Plastic
shopping
bags

Education

Your own
example:

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