Question

Suppose Malaysia imports petroleum from other countries that may impose embargoes on exporting petroleum to the country. Identify negative externalities to demonstrate how in Malaysia market may overconsume petroleum, while the import of petroleum may exceed the efficient level. How may Malaysia cope with this? Diagram/s required.

Answer 1

Malaysia imports petroleum from other countries, other countries on the other hand don't want to export petroleum to Malaysia.

Thus Malaysia is importing Qe quantity whereas the shaded region is the negative externality arising because of the import of oil, cause it is leading to higher social welfare costs of greater pollution level and increased expenditure on health care because of pollution levels. Market is overconsuming by taking in quantity Qe at a lower price where S cuts the D curve, but the costs are actually greater as the import is exceeding the efficient level where D cuts the St curve which is lower quantity and higher price.

Malaysia may increase tax rate on petroleum so that the price moves to the equilibrium level wherein D cuts St and Qo is the demand which reduces because of the imposition of taxes and tariffs.