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1l19i23 12.0? PM Page printer Table of contents Introduction This page focuses on another cause of market failure. the negative spillover costs associated with the consumption of demerit goods and some of the policies that governments can use to reduce the negative spillover costs. While lB students WIII generally understand the concept of external costs they WI\" often struggle with the appropriate diagrams. In Enquiry question .-... Why might the provision of some goods e.g. cigarettes and alcohol be over provided by the market. What measures can a government take to reduce the negative externalities caused by the production and consumption of certain products. Teacher notes Lesson time: 90 minutes Lesson. objectives: Explain. using diagrams and examples. the concepts of negative externalities of production and consumption. and the welfare loss associated with the production or consumption ofa good or service. Explain that demerit goods are goods whose consumption creates external costs. Evaluate. using diagrams. the use of policy responses. including market-based policies {taxation and tradable permits}. and government regulations. to the problem of negative extemaltties of production and consumption. J Teacher notes: Beginning activity .. Which ofthe following demerit goods, in your opinion. should be considered harmful to society - guns. narcotics. alcohol. cars. Which of these do you think is the most dangerous for any society and which the least dangerous? Key terms: aboul:biank pr Page printer give 1/19/23, 12:07 PM P Demerit good - can be defined as one that produces negative externalities when consumed. They are generally over consumed in a free market, relative to the socially optimum level of output and provide another example of market failure. Negative externalities - spillover costs to a third party caused CHOCOLATE by the production, or consumption of a good (or service). They occur when MSC is greater than MSB in the market for a good or service.m Marginal private benefit - the additional benefit obtained by the consumer or producer from the consumption or production of one additional unit of a product Marginal social benefit - equal to the private marginal m&m's give benefit a good provides plus any external benefits it creates. MSB measures the total marginal benefit of the good to society as a whole. MILK CHOCOLATE BAR Marginal private cost - the additional cost incurred by the user MIND or producer of one additional unit of a good or service. Marginal social cost - the total cost to society as a whole when one more unit of a good or service is consumed or produced.; Socially optimum level of output - where the MSB for a good or service is equal to MSC. Tradable pollution permits - sometimes called a cap and trade scheme. This policy provides an economic solution to the problem of negative spillover costs, caused by excessive pollution. Under the scheme each company is given a legal right to pollute a certain amount per fixed time span. Firms that pollute less can then sell their leftover pollution permits to firms that pollute more. d's Indirect (pigouvian) taxes - a tax on any market activity that compensates for the negative externalities created by the consumption / production of a de-merit good. An example might be carbon taxes or excise duty on car fuel or tobacco products. The activities on this page are available as a PDF file at: [_ Demerit goods Activity 2: Different government approaches to demerit goods Complete the following table, which includes a list of goods that produce negative externalities in your country. Divide these into those products which are considered so dangerous that there production and sale is prohibited, goods which are legal but where their consumption and sale is limited / restricted. Lastly, list the goods in your country which are legal and can be sold without limits but are taxed by the government to limit their use. Prohibited Restricted Taxed Tobacco Vage restricted V Petrol Marijuana Hand guns Alcohol Narcotics about:blank 2/9