Externalities Flashcards

1
Q

Definition of Market failure

A

Where the market mechanism fails to allocate resources effectively / efficiently, causing a net welfare loss

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2
Q

Definition of Externalities

A

External effects on an economic unit

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3
Q

Definition of Negative externality

A

When social costs are greater than private costs

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4
Q

Definition of Positive externality

A

When social benefits are greater than private benefits

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5
Q

Definition of Social cost

A

The cost to society from an activity

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6
Q

Definition of Private cost

A

The cost to an individual economic unit of an activity

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7
Q

Definition of Social benefit

A

The benefit to society from an activity

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8
Q

Definition of Private benefit

A

The benefit to an individual economic unit

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9
Q

Definition of Welfare loss

A

When society loses out overall due to an economic activity

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10
Q

Definition of Potential welfare gain

A

If more of something can be produced or consumed it would benefit society overall

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11
Q

Labels for externalities diagrams

A
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
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12
Q

Definition of Socially Optimum Point (QSO)

A

The best level of production for society, where MSC is equal to MSB

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13
Q

Definition of Welfare loss triangle

A

Is the loss to society and is the multiplier for the cost of overproduction

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14
Q

Diagram of Negative externalities of production

A

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

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15
Q

Diagram of Negative externalities of consumption

A

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

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16
Q

Diagram of Positive externalities of consumption

A

Supply lines of MPB below MSB going from top left to bottom right
Demand line of MPC = MSC
Where MPC = MSC meets MPB is P1 with point C of the triangle
Above that on the MSB line is P2 with point A of the triangle
Where MPC = MSC meets MSB is PSO with point B of the triangle

17
Q

Diagram of Positive externalities of production

A

Supply lines of MPC above MSC going from bottom left to top right
Demand line of MPB = MSB
Where MPB = MSB meets MPC is P1 with point A of the triangle
Below that on the MSC line is P2 with point C of the triangle
Where MPB = MSB meets MSC is PSO with point B of the triangle