Externalities Flashcards
Define positive production externality
Benefits gained by a 3rd party due to the production decisions of others MPC > MSC (no MEC, MEB occurs in production) so effectively in the equation MSC = MPC + MEC, MEC is negative as there are no external costs but external benefit Cost only comes to producers
How are positive productions externality goods encouraged
MSC = MSB is Q*
Actual output is at Qa where MPB = MPC —> individual firms maximise their own welfare (external benefits not considered)
Pa reflects private costs so it is higher than the optimal price
Underproduction results in welfare loss
Define positive consumption externality
Benefits gained by 3rd parties due to the consumption decisions of others MSB > MPB, there are external benefits in consumption
How are positive consumption externalities encouraged
MSC = MSB at Q*
Price of last unit consumed is equal to the social benefit derived from it
Actual output is at Qa where MPB = MPC
Pa reflects private benefits Underconsumption results in welfare loss
Define negative production externality
Costs imposed on 3rd parties due to the production decisions of others MSC > MPC, there are external costs
How are negative production externalises discouraged
At Q* MSC = MSB
Price of the last unit of output is equal to the social benefit derived from it
Actual output is Qa where MPB = MPC (firms maximise their own welfare)
Pa reflects private costs and benefits so it is lower than optimal price
Lower price means higher QD resulting in overproduction
Overproduction results in welfare loss
Define negative consumption externality
Costs imposed on 3rd parties due to the consumption decisions of others MPB > MSB, there are external costs so effectively in the equation MSB = MPB + MEB, MEB is negative (no external benefits, only external costs) Benefit only comes to consumers
How is negative consumption externality discouraged
At Q* MSC = MSB
Price of last unit consumed is equal to the social benefit derived from it
Actual output is Qa, it occurs where MPB = MPC (consumers maximise their own welfare)
Pa reflects private benefits
Consumers don’t take into account external costs they impose so they consume more of the good than is optimal
Over consumption results in welfare loss
What curves are associated with positive production externalities
MSB = MPB as there are no consumption externalities (no external consumption costs) MSC below the MPC due to the existence of external production benefits —> social costs are lower than the private costs
What curves are associated with a positive consumption externality
MSC = MPC as there are no external production costs MSB is above the MPB curve due to the existence of external consumption benefits
What curves are associated with a negative production externality
MSB = MPB as there are no external production benefits (no consumption externalities) MSC curve is above the MPC curve as there are external production costs
What curves are associated with a negative consumption externality
MSC = MPC as there are no external production costs (only private production costs) MSB is below the MPB due to the existence of external consumption costs
