Externalities

Question 1

What are externalities?

Answer 1

The costs and benefits to a third party created by a business undertaking its activities (production or consumption)

Note: third party is often society

Question 2

What are private, external and social costs?

Answer 2

Private + External =Social
cost cost cost

Private cost- cost to you (money, health)
External cost - costs to others (service cost- NHS)
Social cost- cost to everyone (you and others)

Question 3

What are private, external and social benefits?

Answer 3

Private + External =Social
benefit benefit benefit

Private benefit- benefit to you (job, intelligence)
External benefit- benefit to others (jobs done well)
Social benefit- benefit to everyone (you and others)

Question 4

What is a positive externality?

Answer 4

Where the social benefits are greater than the private benefits

Question 5

What is a negative externality?

Answer 5

Where the social costs are greater than the private costs

Question 6

What are positive externalities of consumption?

Answer 6

By consuming a good or service there are positive effects to society e.g. education or vaccines

Question 7

What are negative externalities of consumption?

Answer 7

By consuming a good or service there are negative effects to society e.g. smoking or alcohol

Question 8

What are positive externalities of production?

Answer 8

By producing a good or service there are positive effects to society e.g. houses, hospitals, schools

Question 9

What are negative externalities of production?

Answer 9

By producing a good or service there are negative effects to society e.g. pollution