externalities Flashcards
What is a production externality?
A production externality occurs when a PRODUCERS ACTIONS AFFECT A THIRD PARTY not directly involved in the transaction, creating either a cost (negative externality) or a benefit (positive externality).
What is a negative production externality?
A harmful effect on third parties due to production, such as pollution from factories, which can lead to environmental and health costs for society.
What is a positive production externality?
A beneficial effect on third parties from production, like a company training employees who later bring their skills to other workplaces, benefiting the broader economy.
Give an example of a negative production externality.
Pollution from manufacturing plants as it affects air quality and public health.
Give an example of a positive production externality.
A tree farm that improves air quality or a research lab whose discoveries benefit other industries are examples of positive production externalities.
How do negative production externalities affect social costs?
Negative production externalities increase social costs, as they add to private costs the external costs imposed on society, often leading to overproduction.
How do positive production externalities affect social benefits?
Positive production externalities increase social benefits by adding external benefits to private benefits, which often leads to underproduction if not encouraged by subsidies or support.
What is the social optimum in the context of externalities?
The social optimum is the level of production or consumption where social costs and benefits are balanced, resulting in the most efficient allocation of resources for society.
Q: What can governments do to address negative production externalities?
A: Governments can impose taxes, regulations, or penalties to discourage activities with negative externalities, aiming to reduce their impact on society.
Q: How might governments encourage positive production externalities?
A: Governments might provide subsidies, grants, or tax breaks to encourage activities that generate positive externalities, aiming to increase their societal benefits.
