5.4 Positive and negative externalities in production and consumption Flashcards
What are externalities?
Externalities are the costs and benefits to a third party created by economic agents when undertaking their activities
What are positive externalities?
Positive externalities are those benefits to a third party that are not included in the price of the economic activity
What are negative externalities?
Negative externalities are those costs to a third party that are not included in the price of the economic activity
What are private costs?
Private costs are those costs of consuming or producing goods or services that have to be paid for by third parties e.g. the individual or a firm
What are social costs?
Social costs are those costs of consuming or producing goods or services that are paid for by society
What are private benefits?
Private benefits are those benefits of consuming or producing goods or services that are received by an economic unit e.g. the individual or a firm, these are paid for
What are social benefits?
Social benefits are those benefits of consuming or producing goods or services that are received by society
When do positive externalities occur?
When social benefits > private benefits we have positive externalities
When do negative externalities occur?
When social costs > private costs we have negative externalities
Why do both positive and negative externalities lead to market failure?
Both negative and positive externalities lead to market failure because the private consumer or producer is not paying for, or receiving, the full cost or benefit of the economic activity.
What are the 4 categories that externalities can be broken down into?
Positive production externalities
Positive consumption externalities
Negative production externalities
Negative consumption externalities
When do negative production externalities occur?
Negative production externalities occur when the activities of producers lead to costs to a third party that are not included in the price of the economic activity
When do positive production externalities occur?
Positive production externalities occur when the activities of producers lead to benefits for a third party that are not included in the price of the economic activity
When do positive consumption externalities occur?
Positive consumption externalities occur when the activities of consumers lead to benefits to a third party that are not included in the price of the economic activity
When do negative consumption externalities occur?
Negative consumption externalities occur when the activities of consumers lead to a loss of benefit to a third party that are not included in the price of the economic activity
