1.3.2 Externalities Flashcards
What is an externality
Spill-over effects from production and/or consumption for which no appropriate compensation is paid to third parties effected
Why do externalities lead to market failure
And what type of market failure do it lead to
externalities lie outside initial market transaction and not reflected in market price
Meaning price mechanism doesn’t take into account full social costs and benefits of production/consumption
Partial market failure
Externalities can be either:
Positive or Negative
Private Costs are
costs faced by the produer/consumer directly involved in a transaction
External Costs
are the costs imposed on third parties as a result of a transaction that they are not directly involved in
synonym for externalities
Social Costs =
Private Costs + External Costs
Negative Externalities exits when
Social Costs exceed private costs
How does negative externalities link to price and quantity consumed/produced
Price needs to be higher
Quantity conusmed/produced needs to be lower
What is Marginal private costs
cost to the producing firm of producing addtional units of output or
costs to an individual of any economic action
Marginal external Cost
costs to third parties from the production of an additional unit of output
Marginal Social Costs
Total cost to society of producing an extra unit of output
What two things added together form Marginal Social Costs
(MSC)
MPC + MEC
Marginal Private Costs + Marginal External Cost
Give examples of negative externalities from production
Air Pollution
Pollution from fertilizers
Industrial waste
Nosie pollution
Collapsing fish stock
Methane emission
Describe the graph for Negative Externalities
- Two Supply curves (MSC and MPC) which aren’t parallel to another due to MSC needing higher price and lower output
- Where MSC=MPB is the Socially Optimum point
- Where MPC=MPB there is an allocative inefficiency
- The distance between the equilibrium of MPC=MPB and MSC is the Welfair loss
What is a (deadweight) welfare loss
refers to the toal value of the undesired impact of negative externalities, as a result of over production
(Prices are too low and consumption is too high)
What is a positive externalities
exits when third parties benefit from the spill-over effect from production/consumption
Social benefits exceeds private benefits
Private Benefits
benefits faced by the producer or consumer directly involved in a transaction
External Benefits
Benefits enjoyed by third parties as a result of a transaction that they are not directly involved in
(synonym of postive externalities)
Social Benefit =
Private Benefit + External Benefits
How do Positive externalities link to price and quantity consumed/produced
Consumption/Production is too low
Market price is too high/ however more money should be allocated to them because consumers are unaware of importants
What is Marginal Private Benefit (MPB)
Benefits to the consumers of consuming an additional unit of output
Marginal external Benefit (MEB)
Benefit to third paties from consumption of an addition unit of output
Marginal Social Benefit (MSB)
Total benefit to society of consuming an extra unit of output
What two things add together to total Marginal Social Benefit (MSB)
MSB = MPB + MEB
Marginal Private Benefit + Marginal External Benefit
With Positive (consumption) externalities, is marginal social benefit lower than Marginal private benefit
No
Marginal Social benefit is higher
Describe the graph for positive externalities of consumption
- The demand lines for MPB and MSC aren’t parallel because Price needs to be higher and quantiy consumed/produced is higher (due to under consumption)
- Socially optimum point = MSB=MPC
- The Social welfare loss is the distance between where MPB=MPC and MSB
Give examples of postive conusmption externalities
Healthcare programmes
Early years education
Subsidised Bike Schemes
Public Libaries
Museums + Galleries
Free School meal/ nutrional advice
