Introductory Microeconomics

1.a)   According to the attachment 1, out of 18,000 objects moving around the Earth, only about 900 are active and the rest is just debris. “Space waste is not biodegradable”, and the more rubbish in the space, the higher risk of collisions. The effect is adverse, so there’s a negative externality. When there’s a negative externality, the supply curve only reflects the private cost of the decision maker, and not the external social cost. Thus, SMC is above PMC because it takes into account the external costs imposed on society. For the outcome to be socially optimal, PMB=SMB and PMC=SMC. Given that the negative externality exists, the quantity produced is grater than optimal quantity.

b) A few different policies to achieve a socially optimal amount of space debris and reduce negative externality suggested by the article are: an international civil satellite-awareness system, forcing satellite-launchers to buy insurance, moratorium on debris-creating anti-satellite tests, and international guidelines. The awareness system and guidelines will enhance people’s knowledge and appeal to people’s conscience, therefore decrease the number of launching useless satellites and creating debris. For insurance, it will clearly add an additional cost to production, which will increase PMC to equal to SMC, eliminate or reduce the negative externality. Moratorium will reduce the number of debris on space, by banning the launch of debris-creating satellites.
c) ‘Cleaned up’ space is considered as a public good, as it’s neither excludable nor rival in consumption. It is impossible to prevent countries from enjoying better space for them, and it’s not rival in consumption because one country’s enjoyment will not diminish other countries’ enjoyment. Thus, the free-rider problem will arise because; some countries will avoid paying the costs of precaution while they still enjoy the benefit of it. Although in theory, ‘Lindahl Tax’ can fix this free-rider problem, there are limitations... [continues]

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