1.3.2- Externalities Flashcards
What is an externality?
The cost or benefit a third party receives from an economic transaction outside of the market mechanism
What are private costs/benefits?
The costs/benefits to the individual participating in the economic activity
What are social costs/benefits?
The costs/benefits of the activity to society as a whole
What are external costs/benefits?
The costs/benefits to a third party not involved in the economic activity
How do you calculate social costs?
Private costs + external costs
What is marginal social cost
The addition to cost of producing an extra unit of output
What is marginal social benefit?
The addition to total benefits of consuming an extra unit
What is marginal private benefit?
Benefit to the consumer of consuming an additional unit of output
What is marginal external benefit?
Benefit to third parties from the consumption of an additional unit of output
Why is it hard to put a price on externalities?
It is difficult to work out the size of the externality
What are the government policies for externalities?
-Indirect taxes
-subsidies
-regulation
-tradable pollution permits
-provision of the good
-provision of information
Why are indirect taxes useful for externalities?
It reduces the amount of demerit goods consumed and produced as prices increase
Why are subsidies useful for externalities?
They encourage the consumption of merit goods
Why is regulation useful for externalities?
It limits consumption of goods with negative externalities, like banning advertising of smoking
Why are tradable pollution permits useful for externalities?
Allows firms to use up to a certain amount of pollution
