8.4 - Positive and negative externalities in production and consumption Flashcards
What is an externality?
a public good/bad that creates an affect on a third party
What is a positive externality?
an external benefit that occurs through the production/consumption of a good on a third party
What is a negative externality?
external cost that occurs through the production/consumption of a good on a third party
What is a property right?
the exclusive authority to determine how a resource is allocated
What is the free rider problem?
where a free rider benefits without paying because of non excludability. customers choose not to pay for a good and choose to free ride instead, without the incentive to provide the good –> the market will disappear
What is a free rider?
someone who benefits without paying as a result of non-excludability
What is a production externality?
an externality (can be positive or negative) generated in the course of producing a good or service
What is a consumption externality?
an externality (positive/negative) generated from consuming a good or service
What is an example of a negative production externality?
burning coal for fuel. this is because burning coal can seriously harm the environment
What is an example of a positive production externality?
if a coal burning station is by the sea, it may heat some of the water nearby. This could help local fishermen because the water will be warmer and more fish will breed here.
What is an example of a negative consumption externality?
smoking
What is an example of a positive consumption externality?
if you were to benefit from the beautiful view of your neighbours’ garden that is well kept
How do externalities lead to the ‘wrong’ quantity of a good being produced and consumed?
if there is a negative production externality, the real costs of production are dumped on others, not taken on by the producer. in competitive markets, goods end up being too cheap/under priced. Prices do not represent the true costs of production (that include negative externalities) and too much of the good ends up being consumed.
What do costs of production include?
negative externalities
What is the Coase theorem?
market for trading private property rights.
what is the example of the railway in America? (private property rights)
if the locomotives go through fields with crops, it will burn some of them
if the farmers have the right to the fields (a right to not have the trains emit sparks), and emitting sparks is worth more to the railway company than stopping running trains, then the railway will buy the rights to the land. However if the company has the land (and right to emit sparks) then they will not sell this right. In both cases the outcome is the same.
What is the tragedy of the commons?
without private property rights, things can become in common ownership
The tragedy of the commons happens when individuals act in their own self-interest and overuse a shared resource, leading to depletion or destruction of that resource — even though it’s in no one’s long-term interest for that to happen
What is marginal private benefit?
Marginal private cost
What is marginal social benefit?
marginal social benefit = marginal social cost
What is social benefit?
marginal social benefit = marginal private benefit + marginal external benefit
What is marginal social cost?
marginal social cost = marginal private cost + marginal external cost
