1.3 Flashcards
What are externalities?
When consumption or production of a good or service has 3rd party effects.
What are private costs?
What are external costs?
Costs of the transaction to the consumer to the consumer or the producer.
Costs to a third party of the transaction.
What are private benefits and external benefits?
Private benefits: benefits that impact the consumer or producer
External benefits: benefits the third party gets.
What is the formula for social cost benefit.
Social = Private+third party
What is market failure?
When free markets leads to an inefficient allocation of resources.
What is a free market?
When free market results in optimum allocation of resources.
Price move resources to where they are most productive and valued.
Competition prevents firms from exploiting customers.
How can market failure be corrected?
If external costs are reflected in the price.
What are demerit goods? give 2 examples.
Demerit goods are goods that have negative externalities in consumption.
(Cigarettes)
(Alcohol)
What are Merit goods? give 2 examples.
Merit Goods have a positive externality in consumption.
(Vaccines)
(Education)
What do negative externalities cause in terms of cost?
Social cost> private cost
Draw a diagram for negative externalities is production?
Marginal private benefit y= -x
(Page 1) DIAGRAM 1
How to know what lines to draw in externality diagrams?
If it is consumption two benefit curves if it is production two cost curves.
Draw a diagram for positive externalities in production
(Page 1) DIAGRAM 2
Draw a diagram for positive externalities in consumption?
(Page 1) DIAGRAM 3
Draw a diagram for negative externalities in consumption
(Page 2) DIAGRAM 4
