1.3.2 Externalities Flashcards
Wha is externalities?
They are the spill over effects from production and consumption
For which no appropriate compensation is paid to one or more third parties affected.
What is a private cost?
Give a example
They are internal costs faced by the producer or consumer directly involved in a transaction
E.g. costs or running and owning a car
What is external cost?
Give an example
It occurs when the activity of one agent negatively affects the wellbeing of a third party
E.g. imposes costs on other agents
Social cost > private cost
What is private benefit?
It’s the benefit, satisfaction or utility that and in ideal agent like a firm or consumer derives from producing or conusming something
What is social benefit?
It includes private benefits but also adds in the external benefits that might occur from production and / or consumption
What is the marginal private cost?
It’s the internal costs faced to a producer or consumer from supplying or consuming one extra unit of a good/service
What is marginal private benefit?
It’s the extra benefit, satisfaction or utility a producer or consumer gets through consuming or producing one unit of a good/service
What is social cost?
Social cost = private cost + external cost
What is a positive externality?
It occurs when the consumption or production of a good or service creates benefits that spills over to third parties who aren’t directly involved in the transaction
What is a negative externality?
Occurs when the production or consumption of a good or service imposes costs on third parties and people not directly involved in the transaction.
What is positive externality in consumption?
It benefits third parties as a result of the actions of consumers
examples would include healthcare education exercise and healthy eating
How to show private externality in consumption in a graph?
MSB > MPB
the external benefits are greater than private benefits which means social benefits are greater than private benefits.
Explain the positive externality in consumption?
Consumers ignore the social benefits of directions as their only focus on their private benefits due to self interest
Market allocate scarce resources at private optimum rather than Social optimum leading to underconsumption and underproduction of resources
Which leads to miss allocation of resources .
What is positive externality in production?
List some examples
It’s the benefits to 3rd parties as a result of the actions of producers
Examples include in working training and R&D that is available
How to show positive externality in production on a graph?
MSC < MPC
The private costs are greater than the external costs leading to private costs being greater than social cost.
Explain the positive externality in production?
Producers only consider their private costs but not the social costs and external costs due to self interest.
There is an underproduction and consumption at Q1 at private optimum
It’s the best allocation of resources, allocative inefficiency and welfare loss
What is negative externalities in consumption?
List some examples of it
It is the cost of third parties as a result of the actions of consumers
Example examples include smoking excessive alcohol, excessive sugary drinks and fast food
How to show negative externalities in consumption in a diagram?
MSB < MPB
The private benefits are greater than the external benefits leading to private benefits being greater than social benefits.
Explain the negative externality in consumption?
Consumers act in their self interest ignoring social benefits of their consumption
Leads to market allocating at private optimum where MPC cuts MPB
As a result, there is a miss allocation of resources being allocated to this market
What is the negative externality in production?
Give some examples
It’s the cost to 3rd parties as a result of the actions of producers
Examples include air pollution, resource depletion deforestation, waste in water
How to show negative externality in production on a diagram?
MSC > MPC
The external costs are greater than the private costs leading to social costs being greater than private costs
Explain the negative externality in production?
Producers are only focused on private costs.
They are over producing the goods at private optimum
The price is too low and only accounts the private cost and a low price leads to more consumption of these goods
And results is a miss allocation of resources
