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Table of Contents

  1. Topic pack - Microeconomics - introduction
  2. 1.1 Competitive Markets: Demand and Supply
  3. 1.1 Competitive Markets: Demand and Supply - notes
  4. 1.1 Competitive markets - questions
  5. 1.1 Competitive markets - simulations and activities
  6. 1.2 Elasticities
  7. 1.2 Elasticities - notes
  8. Section 1.2 Elasticities - questions
  9. Section 1.2 Elasticities - simulations and activities
  10. 1.3 Government intervention
  11. 1.3 Government Intervention - notes
  12. 1.3 Government intervention - questions
  13. 1.3 Government intervention - simulations and activities
  14. 1.4 Market failure
  15. 1.4 Market failure - notes
    1. The meaning of externalities
    2. Types of externalities
    3. How do externalities affect allocative efficiency?
    4. Negative externalities of production
    5. Negative externalities of consumption
    6. The economic theory of traffic congestion
    7. Demerit goods
    8. Government responses - demerit goods
    9. Possible government responses to externalities
    10. Direct government provision
    11. Extension of property rights
    12. Taxes and subsidies
    13. Tradeable pollution rights
    14. Regulation, legislation and direct controls
    15. Positive externalities of production
    16. Positive externalities of consumption
    17. Merit goods
    18. Why might merit goods be underprovided by the market?
    19. Government responses - merit goods
    20. Public goods
    21. Common access resources & sustainability
    22. The tragedy of the Commons
    23. Common access resources in practice
    24. Sustainability
    25. Threats to Sustainability
    26. The threat to sustainability from the use of fossil fuels
    27. The threat to sustainability from poverty
    28. Government responses to threats to sustainability
    29. Cap and Trade Schemes
    30. Promoting Clean Technologies
    31. The 'dirty side' of cleaner technologies
    32. International responses to threats to sustainability
    33. Asymmetric information
    34. Abuse of monopoly power
    35. Inequality
  16. Section 1.4 Market failure - questions
  17. Section 1.4 Market failure - simulations and activities
  18. 1.5 Theory of the firm
  19. 1.5 Theory of the firm - notes (HL only)
  20. Section 1.5 Theory of the firm - questions
  21. Section 1.5 Theory of the firm - simulations and activities
  22. Print View

Sustainability - The Role of Government

Syllabus: Discuss, using negative externalities diagrams, the view that economic activity requiring the use of fossil fuels to satisfy demand poses a threat to sustainability.

Market failure in production occurs when the production of a good or service creates external costs that are harmful to third parties, e.g. when a factory

pollutes a river with waste or the atmosphere with greenhouse gasses. The total costs to society of these activities are the private costs of the firm plus the external costs that the firm creates, but does not pay for. Since the producer does not pay the total cost, the good or service is over-produced, which results in a welfare loss.

To correct this situation the Government needs to internalise the externality, causing either the MPC curve or the MPB curve to shift closer to MSC (or MSB) ensuring a market equilibrium at or near the Social Optimum.

This is not an easy task because of the necessity to be able to measure intangible effects such as loss of welfare due to externalities.


National governments can respond to negative externalities of production and to resource depletion and CO2 pollution using a number of mechanisms designed to reduce emissions of global greenhouse gasses and promote sustainability. These include:

  • environmental taxation, such as carbon taxes, to recover the external costs of pollution
  • legislation setting environmental standards and banning firms which fail to meet these standards
  • adoption of cap and trade schemes for carbon trading
  • funding for cleaner technologies

Taxation and financial penalties increase the market price of carbon. This provides strong incentives to reduce carbon emissions by sending signals:

  1. to consumers about what goods and services produce high carbon emissions and which should be used more sparingly.
  2. to producers about which inputs emit more carbon, and which emit less, so encouraging them to move to lower-carbon technologies.
  3. to inventors and innovators to develop and introduce lower-carbon products and processes.