1.3.2 Externalties ✅ Flashcards
What are externalities?
Spill-over effect on a third party (due to consumption or production) that is not considered during decision making and not compensated for).
What is a private cost?
Cost taken on by individual or firm from a transaction (eg cost of providing a service).
What is an external cost?
Cost not included in market price.
(Social cost higher than private cost).
What are two externalities?
1) social costs>private costs = over consumed and produced.
2) social benefits>private benefits = under consumed and produced.
What are the private and external costs of a wind farm?
Private cost =
- cost of land +planning.
- manufacturing wind turbines.
- installlation cost.
- labour cost.
External cost =
- visual pollution.
- installation/transport congestion.
- falling property prices.
Draw a negative production externalities diagram? What’s an example?
- noise pollution from planes.
- industrial waste.
What is a merit good v demerit good?
Merit = good w external benefits (society benefit higher than private). In free market are under provided.
Demerit = good w external costs (cost to society is great than private). In free market are over provided.
What is marginal private benefit?
Extra satisfaction of consuming an extra good.
What is the marginal social benefit>
Extra gain to society from consuming one more good.
What is the marginal private cost?
Extra cost to individual from producing one more good.
What is marginal social cost?
Extra cost to society from the production of one more good.
Draw a positive consumption externality? Example?
- healthcare
- education
What is it difficult to do with externalities? What are they involved with?
Work out the size - tends to be put on judgements due to difficulty monetising external costs.
Info gaps (people unaware of full implications).
Explain how a positive consumption externality works?
- Social benefits greater than social costs.
- Left to itself the market will produce at MPB=MPC it will not consider benefits of consuming more.
- If all benefits are considered the market would produce MSB=MSC.
- the failure of the market to consider the external benefits has mean a mosallocation and unconsumpsion.
- the difference between MPB and MSB grows since the external benefits grow the ore people consumer eg benefits of vaccines are larger the more people take it.
Draw a negative consumption externality?
Draw a positive production externality?
