A steel exporter faces a new carbon charge when selling to overseas markets. Its domestic factory had previously paid no price for carbon dioxide emissions,...
Question 1 Report
A steel exporter faces a new carbon charge when selling to overseas markets. Its domestic factory had previously paid no price for carbon dioxide emissions, despite the global impact on climate and economic activity.
(a) What is meant by a negative production externality? [1]
(b) Explain why carbon dioxide emissions can cause international market failure. [2]
(c) Assess one reason why international agreements may be needed instead of one country's policy alone. [1]
Answer Details
(a) A negative production externality is a harmful effect on third parties caused by producing a good or service [1].
(b) Carbon dioxide emissions impose climate-related costs on people in other countries [1], not only on those where the steel is produced. Since the firm does not pay these full external costs, emissions and output are higher than the global socially efficient level [1]. This is international market failure because the effects cross national borders.
(c) International agreements may be needed because emissions cross borders. If one country acts alone, its firms may lose competitiveness while firms elsewhere continue polluting, or other countries may free ride on its action [1]. Coordinated rules reduce this problem.
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