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ECS3704 Assignment 1 Semester 2 2024
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ECS3704 Assignment 1Semester 2 2024
QUESTIONS WITH COMPLETE ANSWERS
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, 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.
To analyze why government intervention may be necessary in the case of
pollution created by steel production and to explain the policy options
available, we can use the concept of negative externalities in economics.
Below is a step-by-step explanation of the analysis, followed by a
description of the policy options. A diagram will help illustrate the points.
Step 1: Understanding Negative Externalities
• Negative Externalities: These occur when the production or
consumption of a good or service imposes costs on third parties who
are not involved in the transaction. In this case, pollution from steel
production is a negative externality because it causes environmental
harm and health issues that affect society, beyond the buyers and
sellers of steel.
Step 2: Market Failure Due to Negative Externalities
• In a free market without government intervention, the steel industry
will produce at the point where marginal private cost (MPC) equals
marginal private benefit (MPB). However, because the negative
externality is not accounted for, the true cost to society, the marginal
social cost (MSC), is higher than the MPC.
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