4.1.8.4 Positive and negative externalities in consumption and production Flashcards
What is an externality?
Spillover effects on third parties outside market transactions.
Positive (benefits, e.g., education → skilled workforce). Negative (costs, e.g., pollution → health problems).
Distinguish private and social costs with examples.
Private: Costs borne by producer (e.g., wages, materials). Social: Private + external costs (e.g., pollution cleanup).
Diagram: MPC (lower) vs. MSC (higher) for negative externalities.
Distinguish private and social benefits with examples.
Private: Benefits to consumer (e.g., job from education). Social: Private + external benefits (e.g., reduced crime from education).
Diagram: MPB (lower) vs. MSB (higher) for positive externalities.
Draw a negative production externality. Label:
MPC/MSC curves, Market vs. social optimum (Qₘᵣₖₜ vs. Qₛₒ), Deadweight loss.
MSC above MPC → overproduction at Qₘᵣₖₜ. Welfare loss triangle between Qₛₒ and Qₘᵣₖₜ.
Draw a positive consumption externality. Label:
MPB/MSB curves, Market vs. social optimum, Welfare gain potential.
MSB above MPB → underconsumption at Qₘᵣₖₜ. Welfare gain triangle between Qₘᵣₖₜ and Qₛₒ.
How do merit and demerit goods relate to externalities?
Merit goods (e.g., vaccines): Positive externalities → underprovided. Demerit goods (e.g., cigarettes): Negative externalities → overprovided.
Why do missing property rights cause externalities?
No ownership → overuse of common resources (e.g., overfishing).
Example: Tragedy of the commons in rainforest depletion.
Give 3 examples of negative production externalities.
Air pollution from factories. Traffic congestion from ride-sharing. Noise pollution from airports.
Give 3 examples of positive consumption externalities.
Vaccinations → herd immunity. Education → lower crime rates. Electric cars → cleaner air.
Where is social optimum achieved?
MSC = MSB → maximum welfare.
Contrast: Market equilibrium (MPB=MPC) ignores externalities.
Why is valuing externalities difficult?
Subjective: Differing valuations (e.g., pollution’s cost to asthma sufferers vs. others).
Policy impact: Taxes/subsidies may be misaligned.
How does this connect to government intervention?
Solutions: Taxes (negative externalities). Subsidies (positive externalities). Regulation (property rights enforcement).
