Understanding Externalities and Market Interventions

The video explores the concept of externalities, focusing on the negative impacts of plastic bags. It discusses how external costs are not factored into market equilibrium and examines policy options like bans, quotas, and taxes to address these costs. The video concludes that a tax on plastic bags could optimize total surplus by aligning the equilibrium quantity with societal benefits, assuming accurate external cost assessment.

What is a negative externality associated with plastic bags?

• Improved recycling rates

• Increased production costs

• Environmental damage

• Higher consumer demand

How is the external cost of a plastic bag quantified in the video?

• 5 cents per bag

• 1 cent per bag

• 10 cents per bag

• 2 cents per bag

What happens to the market equilibrium when external costs are not considered?

• It leads to underproduction

• It results in overproduction

• It shifts to a higher price

• It remains unchanged

What is one potential action a 'benevolent emperor' could take to address external costs?

• Lower taxes

• Increase subsidies

• Encourage more production

• Ban plastic bags

Why might banning plastic bags not be the best option?

• It benefits only a few

• It is too costly to implement

• It increases demand

• It destroys potential surplus

What is a challenge associated with implementing a quota on plastic bags?

• It increases production costs

• It reduces government revenue

• It is easy to enforce

• It requires precise knowledge of demand

How does a tax on plastic bags help address negative externalities?

• By reducing consumer demand

• By shifting the marginal cost curve

• By increasing production

• By eliminating competition

What is a positive side effect of taxing plastic bags?

• Increased consumer spending

• Higher production rates

• Government revenue generation

• Lower environmental impact

Why is a tax considered a flexible solution for addressing external costs?

• It benefits only producers

• It does not affect demand

• It requires no assumptions about cost curves

• It is easy to calculate

What is the main goal of implementing a 2 cent tax per plastic bag?

• To optimize total surplus

• To eliminate plastic bags

• To increase production

• To decrease government revenue