1.3.2 Externalities Flashcards
What are externalities?
The effects that producing or consuming a good/service has on people who aren’t involved in the making, buying/selling and consumption of the good/service.
What are positive externalities?
The external benefits to a third party
What are negative externalities?
The external costs to a third party
When do externalities arise?
When Private costs and benefits are different from social costs and benefits.
What is a private cost?
The cost of an activity to an individual economic unit, such as a consumer or a firm.
Give an example of a private cost
- A chemical company will have to pay for workers, raw materials and plant and machinery when it produces chemicals.
What is a social cost?
The cost of an activity not just to the individual economic unit which creates the cost, but to the rest of society as well.
Give an example of a social cost
- The chemical manufacturer may make little or no payment for the pollution it generates
What is the difference between private costs and social costs?
The externality/ spill over effect
When Social Costs > Private Costs …
There is a negative externality
When Social Benefit > Private Benefit…
There is a positive externality
When do Negative externalities of production occur?
When social costs > Private costs in production
Give an example of a Negative externality of production
When a factory pumps sewage into a river at no cost to itself
When do positive externalities of production occur?
When social costs < Private costs in production
Give an example of positive externalities of production
A supermarket which redeveloped a derelict industrial site for a new stirred but at the same time cleaned up pollution on the site, improved the roads a round the the site and subsidised the construction of some social housing next to the new store.
When do production externalities arise?
When social costs of production differ from the private costs of production
When do consumption externalities arise?
When the social benefits of consumption differ from the private benefits of consumption
When does positive externalities of consumption occur?
When social benefits > private benefits in consumption
Give an example of positive externalities of consumption
When. a child is immunised against chickenpox, it makes it less likely treat another unimmunised child in the local area will get chickenpox
When do negative externalities of consumption occur?
When social benefits < private benefits in consumption
Give an example of negative externalities of consumption
With passive smoking, a person twin ego smokes in their home harms the health of others in the home
Social costs =
Private cost + External Cost
Social Benefit =
Private benefit + External benefit
Negative externalities lead to…
over production/consumption = Market failure
