Externalities Flashcards
externality?
a cost or a benefit that arises from
a) production that falls on someone other than the producer
b) consumption that falls on someone other than the consumer
negative externality
a production or consumption activity that creates an external cost
- **a “spillover” that negatively affects society…society incurs a external cost
- ** MSC=MPC + external cost
positive externality?
a production or consumption activity that creates an external benefit
- **a “spillover” that positively affects society
- **society incurs an external benefit
- *****MSB= MPB + External benefit
what are the four types of externalities?
- neg production externalities
- pos production externalities
- neg consumption externalities
- pos consumption externalities
marginal private cost?
the cost of producing an additional unit of a good or service that is borne by the producer of that good or service
marginal external cost
the cost of producing an additional unit of a good or service that falls on people other than the producer
marginal social cost
the marginal cost incurred by the entire society- by the producer and everyone else on whom the cost falls. it is the sum of Marginal private cost and marginal external cost
marginal private benefit
the benefit of an additional unit of good or service that the consumer of that good or service receives
marginal external benefit
the benefit of an additional unit of good or service that people other than the consumer of the good or service enjoy
marginal social benefit
the marginal benefit enjoyed by society- by the consumers of a good or service and by everyone else who benefits from it. it is the sum of marginal private benefit and marginal external benefit. MSB= MB+Marginal external benefit
what does the government do in the face of external benefits
- public provision
- private subsidies
- vouchers
- patents and copyright
what is the supply curve in an externalities graph?
Supply= Marginal private cost or MC
what is the demand curve in an externalities graph?
Demand= Marginal Private benefit or MB
positive externality 2.0
it is an underallocation because you want MORE of a GOOD thing
—–* correct by offering a subsidy to the firm/industry or vouchers to consumers
negative externality 2.0
it is an overallocation because you want LESS of a BAD thing
-correct by taxing the firm/ industry so they take on the burden of the external cost
