3.2 The Market mechanism Flashcards
Define externalities?
spill over effects from production and or consumption for which no appropriate compensation is paid or recieved
What do externalities cause?
market failure if the price mechanism does not take account of the social costs and benefits of production and consumption
What are private costs?
costs faced by the producer or consumer directly involved in the transaction
What are private benefits?
benefits for producer and or consumer directly involved in an economic transaction
What does the existence of externalities create?
a divergence between private and social costs of production and the private and social benefits of consumption
Social cost formula?
private cost + external cost
Social benefit equation?
private benefit + external benefit
When negative externalities exist … ?
social costs exceed private cost.
- this leads to over production and market failure if producers dont take into account externalities
When positive externalities occur…?
social benefits exceed private benefit (also lead to market failure )
When do negative externlaities occur?
when production and or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid
What are negative externalities in production?
social costs are higher then private costs
What are negative externalities in production?
social costs are higher then private costs
What are negative externalities in consumption?
marginal private benefit of consuming is higher than the marginal social benefit
Examples of negative production externalities?
- pollution
- fishing
- pesticides
- noise
Examples of negative consumption externalities?
- flytipping
- passive smocking
- alcohol
