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OCR 2888: Economics in a European Context

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jameskelsall
I fully understand the diagram about the neg externality caused by over production and consumption of vehicles but I could do with help or in fact just a diagram to show how the reduction of demand for vehicles reduces the extent of the negative externality.

Maybe I'm getting confused (it has been a long time since I did market failure) but wouldn't it just be a shift of the demand curve (represented by the MPB curve) towards the MSB curve on the same diagram?
alex_hk90
Maybe I'm getting confused (it has been a long time since I did market failure) but wouldn't it just be a shift of the demand curve (represented by the MPB curve) towards the MSB curve on the same diagram?


Yep.


The blue line shifts left towards the red one, decresing the -ve externality.
Reply 122
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Lili!
1
If I knew how to draw it on the computer then I would but I'm not incredibly skilled on here so will just try explain it! You have the MPC and MSC curves as normal (with the MSC curve having a steeper gradient than MPC), and also the D=MSB curve. You then label the price and quantity on the axes of where MSB=MPC, and also the deadweight loss to society (the triangle showing the extent that MSC is greater than MPC at this level of output). Riiiight, then you draw D2=MSB2, which is just the original D=MSB curve shifted to the left. You then again label where MSB2=MPC (this should be at a lower output and lower price), and again the deadweight loss triangle. This is smaller than the triangle for the previous equilibrium so woohoo the negative externality has been reduced! You could also say it's been reduced as the linear distance between the MPC and MSC curve is smaller at the second equilibrium than the first...
...right?!
Reply 123
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Lili!
1
Dammmmmmmmn. Beaten! Ok so mine's slightly different to the one above, but same principle so yeah.. :smile:
Reply 124
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boyz123
1
I don't get the idea here. why does the extra regulation force the car manufacturers to relocate the production outside the EU ?

Anybody helps .
Thanks
Reply 125
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boyz123
1
i think you could mention the elasticity of demand and supply curve which may affect the size of dead weight welfare loss.
very helpful... thanks alex, lili, and inflation! I've just realised how simple this is and how wrong my diagram was..i must have drawn it wrong in the first place!

thanks :smile:
boyz123
I don't get the idea here. why does the extra regulation force the car manufacturers to relocate the production outside the EU ?

Extra regulation regarding production methods (such as having to produce cars with certain carbon dioxide emission levels) increases the cost of producing inside the EU.
Reply 128
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boyz123
1
alex_hk90
Extra regulation regarding production methods (such as having to produce cars with certain carbon dioxide emission levels) increases the cost of producing inside the EU.

What kind of cost ? you mean fixed cost right?
My idea is that the extra regulation may be likely to increase the fixed cost of car production ,hence causing greater average cost ,then lower their profitability .That causes them to relocate the production outside the eu

But the thing is why does it increase the fixed cost ??
boyz123
What kind of cost ? you mean fixed cost right?
My idea is that the extra regulation may be likely to increase the fixed cost of car production ,hence causing greater average cost ,then lower their profitability .That causes them to relocate the production outside the eu

But the thing is why does it increase the fixed cost ??

Research and development costs for the technology to manufacture cars which produce lower levels of carbon dioxide emissions, then the use of this technology in manufacturing the cars is likely to be more expensive than the current methods (at least initially).
Reply 130
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boyz123
1
Oh i understand now really appreciated .
You're just great mate.
Thanks

PS: my teacher is just crap .I have studied the whole syllabus on my own this year .
To be honest , for this module i just rely everything we discussed in here so far.
alex_hk90
Extra regulation regarding production methods (such as having to produce cars with certain carbon dioxide emission levels) increases the cost of producing inside the EU.


So we are assuming production regulations are not the same as selling regulation?

Like Ford can produce a very-polluting car outside the EU (more polluting than allowed to be made inside EU) and then they can sell it in the EU market, or not?

I would think not, because that would be a silly loophole.

EDIT: Or they can produce cars with lower CO2 outside the EU because its cheaper than doing so inside the EU. But regardless of this, firms would relocate outside the EU because of the cheaper labour costs.
Reply 132
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boyz123
1
I think the regulation also applies to imported cars , otherwise car manufacturers just simply relocate the production outside the EU.

But does it raise the price paid by the consumers ??
Reply 133
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Lili!
1
Yeah I'd thought before about this.. If a question came up asking us to suggest EU policies, I thought it would be relevant here to write about how imports should be monitored so they abide by the same standards as vehicles produced within the EU.. if that makes sense? Like if a minimum emissions target was set on cars produced within the EU, then surely it should it would need to be imposed on imports aswell (could the EU only allow imports of cars if they meet certain standards or not?). And same for things like labelling the cars before selling (e.g. to inform consumers on their emissions levels, expected cost of running them etc).. I'm guessing that could be applied to imports aswell?
Lili!
Yeah I'd thought before about this.. If a question came up asking us to suggest EU policies, I thought it would be relevant here to write about how imports should be monitored so they abide by the same standards as vehicles produced within the EU.. if that makes sense? Like if a minimum emissions target was set on cars produced within the EU, then surely it should it would need to be imposed on imports aswell (could the EU only allow imports of cars if they meet certain standards or not?). And same for things like labelling the cars before selling (e.g. to inform consumers on their emissions levels, expected cost of running them etc).. I'm guessing that could be applied to imports aswell?


Yeah they can, and I think they do.

Maybe not this, but other practices like this sometimes gets EU into trouble with the WTO. And could possibly have other consuquences, with other regions raising taxes/new regulations to prevent EU importing their goods.
Inflation
So we are assuming production regulations are not the same as selling regulation?

That is an assumption we are making and a very good evaluative point. From the information we are given it appears that it is only a regulation on production, as the car industry are claiming that it would adversely affect the EU's manufacturing sector if the regulations are put into place.
Which would also form a part of government faliure which you could include in any point, like do the manufacturers have a good argument against the regulations, are the government intervening too much to make matters worse...or maybe its a good thing going through this phase now while the USA etc are not. this will make our cars more efficent in the long run therefore making EU more internationally competitive in the long run, although what the extract is arguing is only in the short run..

When doing this exam it should be easy to realise that their are loads of views that need to be discussed, from the car producers to the millions affected through the supply chain and even to the environment people, i.e. we shouldn't be concentrating all our energy only on the car producers in this exam, well thats what I'm going to add in any evaluative comment :smile:
Reply 137
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matz92
Lili!
(with the MSC curve having a steeper gradient than MPC),


why is the MSC curve more inelastic than the MPC curve?

and also been reading your essay plans alex. great work btw, but on the question

Discuss whether further economic integration is in the interests of UK firms and UK
consumers. [20 marks]

under benefits for UK firms youve put

Deflation of wage rates, easier for firms to find labour


why would wage rates necessarily deflate?

and

Markets could become more concentrated leading to higher abnormal profits


why would markets become more concentrated?

cheers!!
Wage rates would deflate because with further integration comes more opportunitys for capital labour and goods to flow across the EU, i.e. Polish people entering this country are allowed to just as we are allowed to go and find work in any other EU state, when this occurs we get lower labour shortages and hence wage rates would decrease i.e. the supply of labour has increased, this can be shown on a AD/AS diagram

and markets become more concentrated following on from that question?

if it is then naturally with further economics integration firms will seek to produce in accession countries rather then in WE, when this occurs we get the clustering effect where companies look to produce in similar areas, when this occurs companies can benefit from lower unit labour costs naturally and hence also external economies of scale, this means the firms costs are reduced and on a firm diagram i.e. mc ac mr ar and so on we would get a higher shaded reigon of abnormal profits, I think thats what Alex meant :smile: unless he meant in an market structure way which means that the market becomes oligopolistic etc which means abnormal profits anyway
matz92
why would wage rates necessarily deflate?

They wouldn't necessarily, but it's quite likely with the lower wage rates in Eastern Europe.

matz92
why would markets become more concentrated?

Again they might not become more concentrated, however there will be greater benefits to be gained through economies of scale, and it may be necessary to reap these to remain viable due to the increased competition.

In this topic there are often many different possible things that may happen, it is in the justification that you will get many of the marks.

And you're welcome. :smile:

EDIT: Alessandro has explained it better. :smile:

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