1.3.2 Externalities

Question 1

Private costs

Answer 1

Cost direct to consumer or producer from economic transaction

Question 2

Private benefits

Answer 2

Benefit direct to consumer or producer from economic transaction

Question 3

External costs

Answer 3

Negative third party effects (or) External costs = social costs -private costs

Question 4

External benefits

Answer 4

Positive third party effects (or) External benefits = social benefits - private benefits

Question 5

Social costs

Answer 5

Cost to society as a result of the transaction made. Social costs = private costs + social costs

Question 6

Social benefits

Answer 6

Benefit to society as a result of the transaction made (or) Social benefits = private benefits + social benefits

Question 7

Negative Externalities of Production

Answer 7

Costs to third parties as a result of the actions of producers (or)
Marginal Social Cost is greater than the Marginal Private Costs. MSC>MPC

Question 8

Positive externalities of Consumption

Answer 8

Benefits to third parties as a result of the actions of consumers (or)
Marginal Social Benefits are greater than the Marginal Private Benefit.
MSB>MPB

Question 9

The impact of externalities on economic agents:

Answer 9

Negative:
-Producers may not fully account for external costs, leading to overproduction of goods with negative externalities.
-Consumers may not fully consider external costs, leading to overconsumption.
Positive:
-Producers may not capture all external benefits, leading to underproduction of goods with positive externalities.
-Consumers may not fully appreciate external benefits, leading to underconsumption.

Question 10

The impact of externalities on government intervention:

Answer 10

-Taxes on negative externalities (e.g., carbon taxes) internalize external costs, reducing overproduction.
-Subsidies on positive externalities (e.g., education subsidies) encourage greater provision of beneficial goods and services.
-Regulations can also be used to limit external costs (e.g., emissions standards) or promote external benefits (e.g., safety regulations)