externalities

Question 1

positive production externalities

Answer 1

• Example: A beekeeper’s bees pollinate nearby crops, benefiting farmers.
• MPC (Marginal Private Cost): The costs that affect the individual or business directly.
• MSC (Marginal Social Cost): The overall costs society, including external effects.
• This is typically lower than MPC because the positive effect on farmers (pollination) isn’t included in the beekeeper’s costs.

MSC<MPC

Question 2

Negative Production Externality:

Answer 2

• Example: A factory pollutes a river while producing goods.
• MPC: The cost the factory incurs to produce the goods.
• MSC: This is higher than MPC because the pollution harms others (like those who use the river), adding extra costs to society.
• Outcome: The factory is doing something bad for society (polluting), but because they don’t pay for the harm, they might produce more than what’s best for society.

MSC>MPC

Question 3

Positive Consumption Externality:

Answer 3

• Example: You get a flu shot.
• MPB (Marginal Private Benefit): The benefit you get from not getting sick.
• MSB (Marginal Social Benefit): This is higher than MPB because others also benefit (you help prevent the spread of flu).
• Outcome: You’re doing something good for society (helping stop the flu), but since you don’t get paid for this benefit to others, fewer people might get vaccinated than what’s best for society.

MSB>MPB

Question 4

Negative Consumption Externality:

Answer 4

• Example: Someone smokes a cigarette in public.
• MPB: The benefit the smoker gets from smoking.
• MSB: This is lower than MPB because the smoke harms others around them (secondhand smoke).
• Outcome: The smoker is doing something harmful to society (secondhand smoke), but because they don’t pay for the harm, they might smoke more than what’s best for society.

MSB<MPB