Examine the likely impact of Thomas Cook’s plan ‘to reduce their airline emissions’ on the social optimum position

Edexcel A-Level Economics Paper 1 June 2021 Extract

Examine the likely impact of Thomas Cook’s plan ‘to reduce their airline emissions’ (Extract B, line 6) on the social optimum position. Use an appropriate externalities diagram in your answer. (8 marks)

As Thomas Cook reduces their airline emissions, the socially optimal position increases from q*1 to q*2 as shown in the diagram below. The free market equilibrium exists when marginal private benefit equals marginal private costs (MPB=MPC). This is because consumers and producers act in their self-interest. They ignore any externalities (positive or negative impacts on third parties). The extract mentions the 'risks presented by climate change' and how Thomas Cook didn't previously 'recognise' these. The socially optimal quantity accounts for this and it’s where marginal social benefit equal marginal social costs (MSB=MSC). As emissions are lower at each unit of output, marginal social cost falls closer to marginal private cost, so the socially optimal quantity increase as shown below. 

However, it is difficult to measure the size of these externalities. It might be possible to measure the amount of carbon emissions before and after the changes but it is always hard to quantify the impact these will have on future generations. 

A-Level Economics Tutoring

I offer one-to-one and small group A-Level Economics tutoring for students across the UK and internationally. With 87+ five-star Google reviews and tutoring experience since 2017, I specialise in helping students understand difficult concepts and improve their exam technique.