Externalities Flashcards
When are externalities created?
When social costs and benefits differ from private costs and benefits.
What are the two types of externalities?
1) Negative externalities/external costs.
2) Positive externalities/external benefits.
What are the two types of negative externalities/external costs?
1) Private costs - the costs to an individual economic agent.
2) Social costs - the costs to individuals and society.
What are the two types of positive externalities/external benefits?
1) Private benefits - the benefits to an individual economic agent.
2) Social benefits - the benefits to individuals and society.
What is the formula for social costs?
Social cost = private cost + external cost
What is the formula for social benefits?
Social benefit = private benefit + external benefit
What is marginal social cost (MSC)?
The total cost to society from the production or consumption of an extra unit of a good or service.
What is marginal social benefit (MSB)?
The total benefit gained by society from the production or consumption of an extra unit of a good or service.
What is marginal private cost (MPC)?
The total cost to an individual economic agent from the production or consumption of an extra unit of a good or service.
What is marginal private benefit (MPB)?
The total benefit gained by an individual economic agent gained from the production or consumption of an extra unit of a good or service.
What are production externalities?
Externalities that arise from the production of goods and services.
What are consumption externalities?
Externalities that arise from the consumption of goods and services.
What are 3 examples of negative production externalities?
1) Damage to the environment from factories, farming, construction, etc.
2) Noise pollution from the airline industry.
3) Over-fishing of the seas.
What are 2 examples of positive production externalities?
1) Redevelopment of an industrial site for retail.
2) Subsidised construction of social housing.
What are 3 examples of negative consumption externalities?
1) Passive smoking.
2) Environmental damage from consumption, e.g. household waste.
3) Anti-social behaviour from a sporting event.
What are 3 examples of positive consumption externalities?
1) Vaccinations.
2) High quality education for children.
3) Health benefits from the consumption of a merit good.
Why is the MPB curve upwards sloping?
Because marginal costs increase as output rises.
Why is the MPC curve downwards sloping?
Because utility falls for each additional unit consumed.
Does MPB = MSB = Demand?
Yes.
What is welfare loss?
When a negative externality is created for the wider community through the consumption/production of a good/service.
What is a welfare gain?
When a positive externality is created for the wider community through the consumption/production of a good/service. E.g. by providing a merit good/service, like gym memberships.
Where is welfare loss on an externality diagram?
The triangle between MSC, MPC and D = MSB + MPB.
Where is welfare gain on an externality diagram?
The triangle between MSB, MSC = MPC and D = MPB.
Where is the equilibrium point on an externality diagram?
Where MPC = MPB.
Where is the socially optimum level of output on an externality diagram?
Where MSC = MSB.
When there are negative externalities, where will the socially optimum level of output be?
Below the free market equilibrium.
When there are positive externalities, where will the socially optimum level of output be?
Above the free market equilibrium.
What are 4 examples of positive externalities/external benefits?
1) Sustainable production - recycling, ‘green’ businesses, etc.
2) Attractive and desirable places to live - architecture and art.
3) Improved national health.
4) A happy society with confident consumers.
What are 4 examples of negative externalities/external costs?
1) Damage to the environment through global warming and resource depletion.
2) Closure of small businesses and the loss of jobs.
3) Damage to national health through the consumption of de-merit goods.
4) Social problems, such as antisocial behaviour or loss of culture and community.
What are the three types of government intervention to correct negative externalities?
1) Subsidies.
2) Indirect taxation.
3) Regulation of markets.
How can subsidies correct market failure from negative externalities?
Subsidies reduce costs of production, incentivising the production of merit goods that may benefit society or protect an industry.
How can indirect taxation correct market failure from negative externalities?
Indirect taxation raises production costs as well as prices for certain goods which may have negative externalities, discouraging production and consumption.
How can the regulation of markets correct market failure from negative externalities?
Governments can intervene to prevent/minimise the misallocation of resources.
