[Date]
ECS3704
Assignment 1
Semester 2 2024
QUESTIONS WITH COMPLETE ANSWERS
, ECS3704 Assignment 1 Semester 2 2024
Analyse with the aid of a diagram, why it may be necessary for government to
intervene in the case of pollution created by steel production. Using the same
diagram, explain the policy options at the disposal of government to address this
issue.
Introduction
Steel production is a vital industry that contributes significantly to economic
development. However, it also generates substantial pollution, which has
detrimental effects on the environment and public health. This pollution is a form
of negative externality, where the full social cost of steel production is not borne
by the producers or consumers, leading to overproduction and excessive pollution.
To correct this market failure, government intervention is necessary. This analysis
will explain why government intervention is needed and explore the various policy
options available to address the issue, illustrated with the aid of a diagram.
The Concept of Negative Externalities
A negative externality occurs when the production or consumption of a good
imposes a cost on third parties who are not directly involved in the transaction. In
the case of steel production, the pollution emitted during the production process
affects the environment and public health, leading to costs that are not reflected in
the market price of steel. This results in a situation where the social cost of steel
production is higher than the private cost incurred by the producer.
Diagram Explanation
ECS3704
Assignment 1
Semester 2 2024
QUESTIONS WITH COMPLETE ANSWERS
, ECS3704 Assignment 1 Semester 2 2024
Analyse with the aid of a diagram, why it may be necessary for government to
intervene in the case of pollution created by steel production. Using the same
diagram, explain the policy options at the disposal of government to address this
issue.
Introduction
Steel production is a vital industry that contributes significantly to economic
development. However, it also generates substantial pollution, which has
detrimental effects on the environment and public health. This pollution is a form
of negative externality, where the full social cost of steel production is not borne
by the producers or consumers, leading to overproduction and excessive pollution.
To correct this market failure, government intervention is necessary. This analysis
will explain why government intervention is needed and explore the various policy
options available to address the issue, illustrated with the aid of a diagram.
The Concept of Negative Externalities
A negative externality occurs when the production or consumption of a good
imposes a cost on third parties who are not directly involved in the transaction. In
the case of steel production, the pollution emitted during the production process
affects the environment and public health, leading to costs that are not reflected in
the market price of steel. This results in a situation where the social cost of steel
production is higher than the private cost incurred by the producer.
Diagram Explanation
