1.3.2 Externalities Flashcards
What is an externality?
Externalities occur when there is an external impact on a third party not involved in the economic transaction, these can be positive or negative.
What is an external cost?
An external cost (negative externality) is the damage not factored in to the economic activity. External costs occur when the social costs of an economic transaction are greater than the private costs.
What is a private cost?
A private cost for the producer is what they actually pay to produce a good/service.
Equation for social costs?
Private cost + external cost = social costs.
What is an external benefit?
An external benefit (positive externality) is the benefit not factored in to the economic activity. External benefits occur when the social benefits of an economic transaction are greater than the private benefits.
What is a private benefit?
A private benefit for the consumer is what they actually gain from consuming a good/service.
Equation for social benefits?
Private benefit + external benefit = social benefits.
When are negative externalities of production normally created?
Negative externalities of production are often created during the production of a good/service.
How is the market failing in the negative externality case?
The market is failing due to over-provision of these goods/services as only the private costs are considered by the producers and not the external costs.
What is the marginal private cost?
The marginal private cost (MPC) is the cost of the next unit produced or consumed.
What is the marginal private benefit?
The marginal private benefit (MPB) is the benefit derived from the production or consumption of the next unit.
When are positive externalities of consumption normally created?
The marginal private benefit (MPB) is the benefit derived from the production or consumption of the next unit.
How is the market failing in the positive externality case?
The market is failing due to under-consumption of these goods/services as only the private benefits are considered by the consumers and not the external benefits.
What is an example of the impact of negative externalities & government intervention?
Example: Extraction of mining iron ore
External costs: Soil erosion/loss of habitat/reduction if local air quality
Possible stakeholders: Miners/Government/Environment/Manager
Government intervention?
What is an example of the the impact of positive externalities & government intervention?
Example: Leisure centres
External benefits: Healthy people require less state medical care/Older people maintain independence for longer and less of a burden on family/state
Possible stakeholders: Leisure centre owners/members/government/economy
Government intervention: Increase provision/Subsidise existing provision/Advertise to raise awareness of benefits
