Externalities Flashcards
name 2 examples of a negative externality
Air pollution from factories, pollution from fertilizers
what are social benefits
total benefit to society from producing or consuming a good/service.
what are private benefits
the direct benefit to the consumer
what are external benefits
positive externalities
What are externalities?
Externalities are the unintended side effects (positive or negative) of an economic activity that impact others who are not part of the transaction. They occur when the private costs or benefits of production and consumption diverge from the social costs or benefits.
How can governments address externalities?
-Taxes: Imposing a tax on activities with negative externalities (e.g., carbon tax) to reflect the social cost.
-Subsidies: Providing subsidies for activities with positive externalities (e.g., grants for renewable energy).
-Regulation: Enforcing limits or standards (e.g., emission caps).
-Tradable permits: Allowing firms to buy and sell the right to emit pollutants (e.g., cap-and-trade systems).
What is the difference between private and social costs/benefits?
Private costs/benefits: The costs or benefits directly incurred by the individual or firm involved in the economic activity.
Social costs/benefits: The total costs or benefits, including those affecting third parties.
What are examples of externalities in real life?
Negative: Air pollution from factories, second-hand smoke from cigarettes, or traffic congestion.
Positive: Education, immunization programs, or technological innovation that benefits multiple industries.
How are externalities related to public goods?
Public goods often involve positive externalities (e.g., national defense or public parks). Since individuals cannot be excluded from benefiting, these goods are typically underprovided in a free market.
