Externalities

Question 1

Externality

Answer 1

Diff between SC/B & PC/B

Question 2

Negative externality

Answer 2

Net SC (SC-SB) > Net PC (PC-PB)

Question 3

Positive externality

Answer 3

Net SB > Net PB

Question 4

Consumption externality

Answer 4

SC of consumption diff from PC … SB< PB so negative consumption externalities
eg smoker - smokes in home So harms themselves & others

Question 5

Marginal SC/B &PC/B

Answer 5

S&P C/B of the last unit produced/ consumed

Question 6

PC &B

Answer 6

C/B of an activity to an Individual econ unit

Question 7

SC &B

Answer 7

C/B of an activity to society as a whole

Question 8

production externalities

Answer 8

SC of Production are diff from the PC … SC< PC SO positive production externalities

Question 9

NE in Consumption Graph analysis

Answer 9

• MSB< MPB bc (SB = PB+ EB → neg impact on 3rd parties so EB neg)

• C ignore full SB of actions & only consider PB bc self interest
- SO market allocates resources at Q1P1 where MPC cuts MPB
→ Overconsumption … overproduction of g/s … misallocation of resources & net welfare loss to society

Question 10

PE in Production

Answer 10

• MSC< MPC bc ( SC = PC + EC → lower cost compared to 3rd parties bc they benefit … SC <PC)

• D only consider PC SO EB to 3rd party bc Self interest
- resources allocated at private not social optimum
→ misallocation… allocative inefficiencies & Net welfare loss