1.3.2 - Externalities

Question 1

What are Private Costs / Benefits?

Answer 1

the costs/benefits to the individual participating in the economic activity -
Demand curve represents private benefits
Supply curve represents private costs

individual producer or consumer.

Question 2

What are social costs / benefits?

Answer 2

The impact on society as a whole

Question 3

What are External costs/benefits

Answer 3

The costs/benefits to a third party not involved in the economic activity. They are the difference between private costs/benefits and social costs/benefits.

Question 4

What is a merit good?

Answer 4

A good with external benefits, where the benefit to society is greater than the
benefit to the individual. These goods tend to be underprovided by the free market.

Question 5

What is a demerit good?

Answer 5

A good with external costs, where the cost to society is greater than the cost
to the individual. They tend to be over-provided by the free market.