Negative externalities and common pool resources

Learning objectives

Define market failure and the socially optimal level of output where marginal social benefit equals marginal social cost

Draw and explain the diagrams for negative externalities of production and consumption, identifying the welfare loss and the link to demerit goods

Explain why common pool resources such as fisheries, forests and clean air are overused (the tragedy of the commons) and the threat this poses to sustainability

Evaluate government responses to negative externalities: Pigouvian and carbon taxes, legislation and regulation, education and awareness, tradable permits, international agreements and collective self-governance

Assess the strengths and limitations of each response, including the difficulty of measuring externalities and the need for international cooperation