Externalities Flashcards
private cost
a cost
incurred by an individual
(firm or consumer) as
part of its production
or other economic
activities
external cost
a cost
associated with an
individual’s (a firm or
household’s) production
or other economic
activities, which is
borne by a third party
and is not reflected in
market prices
social costs
sum of private and external costs
private benefit
the
benefit received by an
individual (a firm or
consumer) as part of its
economic activity
external benefit
e benefit received
by society (a firm or
household) that accrues
to a third party (firm or
household) not engaged
in that economic
activity, but which is
not reflected in market
prices
social benefit
sum of private and external benefits
externality
a spillover cost or a
benefit that is external
to a market transaction and imposed on a third party not involved in the economic transaction that caused the externality
and is thus not reflected
in market prices
can make more specifc for production/consumption externality
deadweight welfare loss of an externality
the loss in social welfare
that arises when an
externality moves a
market away from its
optimum position
adverse selection
type of asymmetric information - a situation in which a person at risk is
more likely to take out
insurance
see meaning of asymmetric info
moral hazard
asymmetric information - risks that someone or something becomes more inclined to take because they have reason to believe that an insurer will cover the costs of any damages
cost-benefit analysis
a process of
evaluating the worth of
a project by comparing
its costs and benefits,
including both private
and social costs and
benefits – including
externality effects
see steps of CBA, make flashcard
shadow price
one that is applied where there is no established market price available for costs and benefits
e.g. transport projects - need to value the benefit of cleaner air or the time saved for commuters
benefit:cost ratio
net benefits (social benefits - social costs) as a proportion of net costs
