Externalities Flashcards
How do you label free market and socially optimal output on externality
Qfm and Qso
What is an externality
a benefit or cost to a third party arising out of production or consumption of a good/service
Why do externalities cause market failures
Because the private decision maker fails to account for external benefits/ costs leading to over or under allocation
When do externalities occur
When there is a divergence between private and social costs or private and social benefits
Example of positive production externality
Honey production (helps bees, who help the environment by pollinating plants)
Example of positive consumption externality
Health eg vaccines,
Education
Example of negative consumption externalities
Cigarettes, alcohol
Example of negative production externality
Natural resource extraction including forestry
How do you show welfare loss in externality diagrams
Goes along 2 points of the MSC
