1.3.2 Externalities Flashcards
What is meant by an externality?
The spillover on the third party from an economic activity undertaken by the first party
What is private cost?
The cost of an activity to the FIRST PARTY from undertaking an economic activity
What is the social cost?
The effect of an economic activity on wider society
What is a negative externality?
When marginal social cost exceeds marginal private cost
What is a private benefit?
The benefit to the first party from undertaking an economic activity
What is the social benefit?
The benefit to wider society from an economic activity being undertaken
What is a positive externality?
When marginal social benefit exceeds marginal private benefit
At what point does the market not fail?
When Marginal Social Cost = Marginal Social Benefit. Social welfare is maximised
Show on a diagram when a market does not fail with externalities?
Why does Marignal Social Benefit and Marginal Private Benefit slope down?
The theory of diminishing marginal utility, any additional units consumed will have less of a benefit to society and the individual
What point does point QA show us and what does this tell us about the market?
QA shows the market is producing too much. Marginal Social Cost is exceeding Marginal Social Benefit. The market is failing.
What does point QB show us an what does it tell us about the market?
QB shows that the market is producing TOO LITTLE. Marginal Social Benfit is exceeding Marginal Social Cost. The market is failing
What 4 lines do you need on a diagram to show a negative externality?
- Marginal Social Cost
- Marginal Private Cost
- MSB = MSC
Which war are the Marginal Social Cost and Marginal Social Benefit lines sloping?
They’re sloping up
Show a negative externality on the diagram?
Red = negative externality
