1.1.6 externalities Flashcards
Externalities
Spill-over effects generated to third parties as a result of consumption or production
Private costs
Costs of an economic activity to individuals and firms
Examples of private costs
- Drivers (cost of car, insurance, license, etc.)
- Producers (costs of production, etc.)
External costs
Negative spillover effects of an economic activity incurred by third parties for which no compensation is paid
Examples of external costs
- Air/noise/water/visual pollution
- Congestion
- Environmental damage
- Overcrowding
- Resource depletion
- Carbon emissions
Private benefits
Benefits of an economic activity experienced by consumers or producers
Example of a private benefit
- Car owners (saving time from commuting)
External benefits
Positive side effects of an economic activity experienced by third parties for which no money is paid beneficiary
Examples of external benefits(merit goods)
- Education
- Healthcare services
- Vaccinations
Social costs
Costs of an economic activity to society as well as the individual or firm
Social benefits
Benefits of an economic activity to society as well as to the individual or firm
Equation for social costs
Social costs = private costs + external costs
Equation for social benefits
Social benefits = private benefits + external benefits
