1.1.6 Externalities

Question 1

What is an externalities

Answer 1

a cost or benefit that is caused by one party but financially incurred or received by another.

Question 2

What are examples of negative externalities

Answer 2

Pollution​

Congestion​

Environmental damage

Question 3

What is negative externalities

Answer 3

A negative effect to a third party from the production or consumption of a good​

Question 4

What is external benefits

Answer 4

A positive effect to a third party from the production ​or consumption of a good

Question 5

What are some positive externalities

Answer 5

Positive Externalities​

Education​

Healthcare​

vaccinations​

Question 6

When does a positive externalities occur

Answer 6

A positive externality occurs when the benefits arising from a decision are experienced by third parties who were not involved in making the decision. ​

Question 7

What is the formula for social cost

Answer 7

Social costs = private costs + external costs​
Social costs = total cost to society​
Private costs = faced / paid directly by the producer or consumer​

External cost = negative externalities​

The firm does not pay for the external costs it creates – therefore it over-produces in a free market creating a misallocation of resources (market failure)​

Question 8

How to calculate social benefits

Answer 8

Social benefits = total benefit to society from producing or consuming a good/service.
Private benefits = the direct benefit to the consumer​
External benefits = positive externalities

Question 9

Example of social benefits

Answer 9

Vaccines​

Private benefit: Healthier and therefore greater earning potential​

External benefit: Less chance of catching contagious disease