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Negative Production Externalities (Chain of Analysis)

AS, A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 21 Mar 2021

This is a short revision video revising how negative production externalities can cause market failure.

Chain of Reasoning - Negative Production Externalities

Explain how negative externalities from production can cause market failure

Externalities are spill-over effects from production and consumption for which no compensation is paid. Externalities lie outside the initial market transaction/price.

Examples of negative production externalities include the external costs of pesticides used in intensive farming and damage to ocean beds from industrial fishing.

The over-use of pesticides will pollute rivers and streams which then causes harm to those who use them. Marginal social cost therefore exceeds marginal private cost (MSC>MPC).

If market output supplied is higher than the social optimum then there is market failure and a deadweight loss of social welfare. Some intervention might be needed.

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