1.3.2 Externalities Flashcards
Externalities
third-party/spill over affect from production and/or consumption for which no appropriate compensation is paid to one or more third parties affected
Positive externalities / External benefits
When third parties benefit from the spillover effects of production/consumption.
This causes private costs to exceed social costs
Negative externalities / External costs
One third parties are negatively affected by the spillover effect of production/consumption by imposing external costs on them
This causes social costs to exceeded private costs
Deadweight loss
The loss in producer and consumer surplus due to an inefficient level of production perhaps resulting from market failure or government failure
Consumer surplus
A measure of the welfare that people gain from consuming goods and services or a measure of the benefits they derive from the exchange goods.
It’s the difference between the total amount that consumers are willing and able to pay for a good and the total they pay
Producer surplus
The difference between what producers are willing and able to supply for a good and the price they actually receive
Marginal external benefit (MEB)
Benefit to third parties from the consumption of extra unit of output
Marginal external cost (MEC)
Cost to 3rd parties from the production of an additional unit of output
Marginal private benefit (MPB)
benefit to the consumer of consuming an extra unit of output
Marginal private cost (MPC)
Cost to the producing firm of producing an additional unit of output
Marginal social benefit (MSB)
total benefit to society from consuming an extra unit
MSB = MPB + MEB
Marginal social benefit = marginal private benefit + marginal external benefit
Marginal social cost (MSC)
total cost to society of producing an extra unit of output
MSC = MPC + MEC
Marginal social cost = marginal private cost + marginal external cost
Net social benefit
A measurement of the net impact of an investment project found by estimating the social costs and benefits
Private/internal benefit
The rewards to individuals, firms or consumers from consuming or producing goods and services
Private / internal cost
Costs of an economic activity to individuals and firms
