1.3.2 externalities

Question 1

definition of an externality

Answer 1

when third parties are impacted by the market transaction

Question 2

definition of a positive externality

Answer 2

there is a positive impact on third parties e.g. university education, vaccinations

Question 3

definition of a negative externality

Answer 3

there is a negative impact on the third party e.g. factory pollution, race tracks (noise)

Question 4

characteristics of a negative externality graph

Answer 4

two cost curves (MSC and MPC) point upwards

MPB = MSB pointing downwards

MSC > MPC

MPC = MPB (market optimum) > MSC = MSB (social optimum)

welfare loss points left

Question 5

characteristics of a positive externality graph

Answer 5

two benefit curves (MPB and MSB) pointing upwards

MPC = MSC pointing downward

MSB > MPB