Externalities Flashcards
Definition of Market failure
Where the market mechanism fails to allocate resources effectively / efficiently, causing a net welfare loss
Definition of Externalities
External effects on an economic unit
Definition of Negative externality
When social costs are greater than private costs
Definition of Positive externality
When social benefits are greater than private benefits
Definition of Social cost
The cost to society from an activity
Definition of Private cost
The cost to an individual economic unit of an activity
Definition of Social benefit
The benefit to society from an activity
Definition of Private benefit
The benefit to an individual economic unit
Definition of Welfare loss
When society loses out overall due to an economic activity
Definition of Potential welfare gain
If more of something can be produced or consumed it would benefit society overall
Labels for externalities diagrams
MSC - Marginal Social Cost MPC - Marginal Private Cost MPB - Marginal Private Benefit MSB - Marginal Social Benefit PSO - Socially Optimum Price QSO - Socially Optimum Point Welfare Loss Triangle
Definition of Socially Optimum Point (QSO)
The best level of production for society, where MSC is equal to MSB
Definition of Welfare loss triangle
Is the loss to society and is the multiplier for the cost of overproduction
Diagram of Negative externalities of production
Supply lines of MSC above MPC going from bottom left to top right
Demand line of MPB = MSB
Where MPB = MSB meets MPC is P1 with point C of the triangle
Above that on the MSC line is P2 with point B of the triangle
Where MPB = MSB meets MSC is PSO with point A of the triangle
Diagram of Negative externalities of consumption
Supply lines of MPB above MSB going from top left to bottom right
Demand line of MPC = MSC
Where MPC = MSC meets MPB is P1 with point B of the triangle
Below that on the MSB line is P2 with point C of the triangle
Where MPC = MSC meets MSB is PSO with point A of the triangle
