Externalities Flashcards
What is an externality?
externality occurs when the production or consumption of a good or service creates external costs or benefits that affect third parties not involved in the transaction.
Give three examples of negative externalities.
Smoking creating health issues for others, loud music disturbing residential areas, and toxic chemicals from a factory polluting a river.
What is an example of a positive externality?
A neighbor maintaining a beautiful garden, or someone getting vaccinated, which helps protect others from disease.
Define “private costs.”
are costs incurred by the individual or business that uses a product or service.
Define “social costs.”
the total cost to society as a whole due to the production or consumption of a product or service, including both private and external costs.
When does a negative externality occur?
A negative externality occurs when the social cost (cost to society) is higher than the private costs.
Define “private benefits.”
Private benefits are the gains or advantages enjoyed by the individual from using a good or service.
Define “social benefits.”
are the total advantages or gains to society as a whole from the use of good/service which include both private benefits + any positive externalities.
When do positive externalities occur?
Positive externalities occur when the social benefit is greater than the private benefit.
What is a negative consumption externality?
A negative consumption externality occurs when the social benefit is less than the private benefit, meaning consumption activities impose additional costs or reduce benefits for others not involved in the market transaction.
What are the external costs associated with smoking?
External costs of smoking include health issues for non-smokers through second-hand smoke, increased public health costs, and environmental pollution from cigarette litter.
