Knowledge 4, Application 4, Analysis 8,
Evaluation 9
Definition of external costs.
Identification of external costs likely in the energy
market.
Explain the reason for government intervention, e.g.
overconsumption and the need to reduce it.
Diagram identifying external costs and the need to
reduce it – linking to overproduction/deadweight
loss:
– Indirect taxation – ad valorem and specific – costs
rise for firm – reducing supply and quantity/may used
funds to compensate third party/increases incentive
to move to production of energy with lower external
costs. But if demand inelastic just passed on to
consumer/little impact on consumer/measurement
problem to decide size of tax/may not be
reinvested/used to compensate third parties/
avoidance/evasion
– Tradable pollution permits – how it works/incentive to
reduce pollution to be able to sell them/those that do
rewarded/ those that don’t have added costs/
But only works if right quantity sold/some may not
bother if surplus permits/costs to administer/monitor
– Extension of property rights – third party can seek
compensation. But only those that can afford to
pursue will/no guarantee that you can prove they are
the guilty party/energy companies large have
expensive and powerful lawyers
– Regulation – banning or setting limits on energy
production. But expensive to police/measurement
problem – what limits to set.
Diagrams may be rewarded where appropriate.
NB
For a Level 4 response, candidates must
consider two methods in their answer.
