Policies to correct positive and negative externalities — AQA GCSE Economics
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Policies to correct positive and negative externalities explained
Governments use policies to correct market failures caused by externalities.
Read the full explanation
For negative externalities, where third parties suffer costs like pollution, the government aims to reduce production or consumption. They can impose indirect taxes to increase production costs, internalising the externality, or use regulations such as emissions limits. For positive externalities, where third parties benefit like with vaccinations, the government aims to increase consumption. They can provide subsidies to lower prices and encourage use, or provide the good directly, as seen with state education. The goal is to align private costs and benefits with social costs and benefits, ensuring resources are allocated efficiently to maximise social welfare.
Your focus
- Identify government policies used to correct positive and negative externalities.
- Explain how taxes and regulations reduce the impact of negative externalities.
- Analyse how subsidies and state provision encourage activities with positive externalities.
Policies to correct positive and negative externalities exam tips
Marking Points
- Indirect taxes increase production costs, reducing the supply of goods with negative externalities.
- Subsidies lower prices, encouraging the consumption of goods with positive externalities.
- Regulation can legally restrict or ban activities that generate significant negative externalities.
- State provision ensures that goods with positive externalities, which might be under-provided by the free market, are available to all.
Examiner Tips
- 💡Clearly distinguish between the private and social costs or benefits when explaining why a policy is needed.
- 💡Use specific examples, such as a tax on sugary drinks or a subsidy for solar panels, to illustrate government policies.
- 💡Consider the difficulties governments face in accurately measuring the size of an externality to set the correct tax or subsidy.
Common Mistakes
- Mistake: Stating that taxes ban the production of a good. Correction: Taxes only increase the cost of production to reduce quantity, they do not make the good illegal.
- Mistake: Confusing positive and negative externalities. Correction: Positive externalities provide benefits to third parties, while negative externalities impose costs on third parties.
- Mistake: Assuming subsidies are used for negative externalities. Correction: Subsidies are used to encourage positive externalities, whereas taxes are used to discourage negative externalities.