1.3.2 - Externalities Flashcards
What are Private Costs / Benefits?
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.
What are Social costs / Benefits?
The impact on society as a whole
What are External costs/benefits
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.
They are the externalities.
What is a merit good?
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.
What is a demerit good?
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.
When do positive consumption externalities occur?
When social benefits are greater than social costs.
There is often an underproduction
When do negative production externalities occur?
When the social costs are greater than private costs.
Impact on society is bigger than the impact on the individual.
Common evaluation for externality?
It is difficult to work out the size of the externality. Many externalities are involved with infomation gaps as people are unaware of the full implications of their desicions.
