Chapter 15: Positive & Negative Externalities Flashcards
Graph notes are separate
Externalities OR Spillover Effect
External impact on a third party not involved in the economic transaction. It is the difference between social costs/benefits and private costs/benefits.
Define social cost
The private
and external costs combined
Define social benefit
The private and external benefits combined
What is a private cost?
Private cost is the cost of an activity to an individual economic unit, such as a consumer or firm.
What is an external cost?
External cost (negative externality) is the damage not factored in to the economic activity (for example, generating air pollution when producing electricity, which creates a third party cost)
Private cost + external cost = ?
Private cost + external cost = social costs
What is a private benefit?
A private benefit is the benefit of an activity to an individual economic unit, such as a firm or individual.
What is an external benefit?
An external benefit (positive externality) is the benefit to a third party not factored in to the economic activity (for example, someone who studies law enjoys private benefits but third parties benefit from having strong legal institutions)
Private benefit + external benefit = social benefits
Private benefit + external benefit = social benefits
What are external costs of production?
Negative externalities of production are created during the production of a good/service. They exist when social costs exceed private costs.
What are negative consumption externalities?
When social benefits are less than private benefits (a person who smoke in their own home, for example, harms the health of other in their own home)
What are positive externalities of consumption?
When social benefits are greater than private benefits in consumption.
For example, when a child is given an injection to prevent a disease, it makes it less likely that another unprotected child in the area will get the illness.
What are positive externalities of production?
When social costs are less than private costs. For example, a supermarket redevelops a disused industrial site for a new store (instead of something more valuable to society), but also cleans up pollution on the side and improves the roads around the site.
How do externalities relate to market failure?
Misallocation of resources will occur if market prices do not accurately reflect the costs and benefits of economic activities to society. There will only be a social optimum position if output occurs where social costs equals benefits. The greater the externality, the larger the difference between SC and PC, and SB and PB, and therefore the greater the market failure and the less market prices provide accurate signals for optimal allocation of resources.
What is a margin?
A point of possible change
