Micro Unit 6

6.2- Negative Externalities

Part 1 – Check Your Understanding​​-​ Read the following passage from the ​National Fire Protection
Association regarding consumers fireworks ​and answer the questions below.
“Fireworks start an average of 18,500 fires per year, including 1,300 structure fires, 300 vehicle
fires, and 16,900 outside and other fires. These fires caused an average of three deaths, 40
civilian injuries, and an average of $43 million in direct property damage.” ​(www.nfpa.org)
1. Fully explain why consumer fireworks can be considered an example of a negative externality.
The firms that produce fireworks are factoring in only their private (internal) costs. They ignore the
external costs of fire, injuries, and property damage. The true costs of fireworks are higher than the
market is calculating because other people, that were not involved in the purchase or sale of fireworks,
are being negatively affected.
2. When the government is not involved, is the market price for consumer fireworks higher, lower, or
equal to the socially optimal price. Explain.
The market price of fireworks is lower than the socially optimal price because the external costs are
being ignored by firms.

3. Identify two different government policies that could reduce fires and injuries caused by fireworks.
Tax fireworks, limit what types of fireworks can be produced, ban fireworks, etc.

4. In 2017, the state of Pennsylvania imposed an additional 12% sales tax on consumer fireworks.
Identify one specific behavior that could limit this policy’s effectiveness in preventing fires and injuries.
Buyers could buy fireworks in adjacent states, sellers could sell fireworks illegally, people could try
making more dangerous homemade fireworks, etc.

Part 2 – Graph It!​​-​ The graph below shows an unregulated market for high powered consumer
fireworks. Assume that each box of fireworks generates $40 of external costs on society and that the
demand equals the marginal social benefit (MSB).
5. Identify the equilibrium price and quantity
produced by the unregulated market.
Price = $40, Quantity = 50
6. Add a marginal social cost (MSC) curve to the
graph and identify the socially optimal price and
quantity.
Price = $60, Quantity = 30
7. At the quantity of 50 boxes of fireworks, shade
in the area of deadweight loss.
Grey triangle on graph
8. Assume that the demand for fireworks
suddenly became more inelastic. Would the
deadweight loss that results from the unregulated
market increase, decrease, or stay the same.
Explain. ​DWL would decrease. Demand and
MSC would intersect at a point to the right of 30
units. See dotted line on graph.

Video Help: ​https://goo.gl/UfQFQd

9. Assume that the government imposes a $20 per unit tax on fireworks, does this policy eliminate
deadweight loss. Explain. ​No, DWL would not be eliminated. It would just be smaller. A $20 tax would
cause the supply curve to shift to the left by the vertical distance of $20. The result is an output of 40
units, but the socially optimal output is 30 units. The DWL would still exists.
10. Assume instead that the government bans fireworks, does this eliminate deadweight loss? Explain.
No, DWL would not be eliminated. If they ban fireworks the quantity would be 0, but the socially optimal
quantity is 30 units. DWL would still exist because they would be under producing fireworks.
Part 3 - Making Connections​​- ​Read the following and use the graph to answer the questions.

“...with processed food and sweetened drinks becoming household staples. Even very low-income
communities are seeing rising rates of obesity, diabetes, cancer, and heart disease....There are
immense costs, in terms of lost productivity, lost wages, increased health expenditures, and a smaller
labor force....To tackle this health crisis, a new task force of well-known academics and advocates is
encouraging developing nations to treat candy and soft drinks as many of them treat alcohol and
cigarettes -and to tax them….”
[ Lowrey, Annie. “More Taxes and Less Death?” ​The Atlantic​, Jan. 25, 2018.]

The graph to the right shows the market for soda with the
marginal social benefit (MSB), marginal private benefit
(MPB), and marginal social cost (MSC).

11. Calculate the dollar value of the external cost when

30,000 cases of soda are produced. ​$1 (the vertical
distance between the MPC and the MSC)
12. Calculate the dollar value of the external cost when
40,000 cases of soda are produced. ​$2
13. Calculate the dollar value of the external cost when
50,000 cases of soda are produced. ​$3
14. The MSC is often drawn parallel to the MPC but in
most real-world situations the the MSC increases at a
faster rate. Using the example of soda, explain why the
external cost increases as more cases are produced.
The negative health effects are very low when only a little
soda is being produced and consumed. But, producing
more and more soda could cause more and more negative health effects that become more and more
drastic. For example, the sale of more soda could mover consumers from early onset diabetes (which is
bad, but not that bad) to full blow diabetes (which has significantly more costs for individuals and
society).
15. Explain why it is difficult to accurately calculate the external cost of soda in the real-world. ​Answers
will vary. There are other factors that affect health and productivity.
16. Do you think that the government should regulate and tax soda like they do alcohol and cigarettes?
Fully explain your opinion. ​Answers will vary.

Video Help: ​https://goo.gl/UfQFQd