1.3.2 Externalities Flashcards
Positive externality
A benefit third parties receive from a market transaction.
Negative externally
A cost third parties receive from a market transaction.
Demerit goods
Goods which society over produces and are not in people’s best interest.
They are caused by information failure, since consumers are not aware of the costs of consuming the good.
Merit goods
Goods which are provided by the government for free because the government believes everyone should benefit from them even if someone cannot afford it.
They are caused by information failure as consumers are not aware of the benefits.
Private costs
The cost of an activity to a consumer or producer.
Social costs
The cost of an activity to society.
SC= private cost + external cost
External costs (negative externalities)
A cost third parties receive from a market transaction.
Difference between SC and PC.
Private benefits
The benefit of an activity to a consumer or producer.
Social benefits
The benefit of an activity to society.
SB = private benefit + external benefit
External benefits (positive externality)
A benefit third parties receive from a market transaction.
Difference between PB and SB
