Externalities Flashcards
When does a market fail?
A market fails when the price mechanism ( forces of supply and demand ) fails to allocate scarce resources efficiently and society suffers as a result.
What does market failure bring about?
Market failure brings about government intervention.
What occurs in complete market failure?
In complete market failure, no market exists, this is a missing market.
What are externalities?
- Externalities are effects that producing or consuming a good/service has on the people who aren’t involved in the making, buying/selling and consumption of the good/
- Alternatively these people are known as third parties.
What are the two types of externalities?
- Positive
* Negative
What are positive externalities?
External benefits to a third party.
What are negative externalities?
External costs to a third party.
What two situations may lead to externalities?
- Consumption
* Production
What is the private cost?
Cost of doing something to either a consumer or a firm.
Examples:
• A cost a firm pays to make a good is its private cost
• Price a consumer pays to buy the good is their private cost
What are external costs caused by?
External costs are caused by externalities
What is the social cost?
Full cost borne by society of a good or service
How is the social cost worked out?
• Adding the private cost to the external cost
What is the private benefit?
Is the benefit gained by a consumer or a firm by doing something.
What are the external benefits?
Benefits caused by externalities
How is the social benefit worked out?
Private benefit + the external benefit
What is the social benefit?
The full benefit received by society from a good or service.
Why dose market failure occur?
Market failure occurs because in a free market the price mechanism will only take into account the private costs and benefits but not the external costs and benefits.
What is the marginal private cost?
Cost of producing the last unit of a good.
What is the marginal social cost?
The private cost + the external cost.
How is the external cost of production worked out?
- The difference between the MPC and MSC curves.
* If the curves diverge then external costs per unit increase with output.
What happens if the MPC and MSC curves diverge?
The external costs per unit increase with output
What happens if the MPC and MSC curves are parallel?
Then external costs per unit produced are constant.
What is an example of where the curves may diverge?
The external costs per unit created by the pollution can increase as output increases.
What is the marginal private benefit?
The benefit of someone consuming the last unit of a good
