1.3.2: Externalities Flashcards
What is an externality?
An external cost/benefit that is not directly involved in the transaction.
What is a private cost/benefit?
The cost/benefit to the individual participating in the economic activity.
What is a social cost/benefit?
The cost/benefit of an activity to society as a whole.
What is an external cost/benefit?
The cost/benefit to a third party not involved in the economic activity.
What does a negative production externalities graph look like?
What does a positive consumption externalities graph look like?
What does P1Q1 represent?
Market equilibrium.
What does P1Q1 represent?
Market equilibrium.
What does P2Q2 represent?
Social optimum position.
What does P2Q2 represent?
Social optimum position.
What does the orange triangle represent?
Welfare loss.
What does the orange triangle represent?
Welfare gain.
How does the government intervene with externalities?
*Taxing goods with negative externalities.
*Provision of goods with positive externalities (subsidy).
*Regulation of goods with negative externalities (e.g. banning advertising of smoking).
