Externalities Flashcards
Part 2
What does it mean if the MPB and MSB curves are parallel?
• The external benefits per unit are constant.
What does it mean where the difference between the MPB and MSB curves diverges?
The external benefits per unit increase with output
What occurs where supply and demand are equal?
Equilibrium in the free market.
What occurs in a free market in regards to benefit & cost?
- Consumers and producers only consider their private costs and private benefits.
- They ignore social costs and benefits.
How is the MPC curve affected in a free market?
The MPC curve can be seen as the supply curve of a good service, and the MPB curve can be seen as the demand curve.
Where does equilibrium occur in a free market?
Where MPC = MPB
What is the socially optimal point in a free market?
MSC = MSB
This is because it includes the external costs and benefits to society.
• This level of output and price will give society the maximum benefit of any positive externalities and still cover the cost of any negative externalities.
What may ignoring negative production externalities lead to?
- Would lead to overproduction and underpricing
- More is produced and sold at a lower price than is desirable
- For each unit of this god produced, the marginal social cost is greater than the marginal social benefit.
What does ignoring positive externalities lead to?
- In a free market only private benefits are considered.
- This would cause under consumption and under pricing of this good, less is consumed and sold at a lower price than is desirable for society.
- For each unit of this good consumed, the marginal social benefit is greater than the marginal social cost.
What is the area between the marginal social benefit and marginal social cost?
Area of potential welfare gain, the gain to society lost by ignoring positive externalities?
What is the area between the marginal social cost and the marginal social benefit ( negative externalities )?
Area of welfare loss, loss to society caused by ignoring externalities.
What does ignoring negative consumption externalities lead to?
Where the marginal private benefit is larger than the marginal social benefit.
• This may lead to overconsumption and overpricing of the good, more is consumed and sold at a higher price than is desirable for society.
• For each unit of this good produced, the marginal social cost is greater than the marginal social benefit.
What does ignoring positive production externalities lead to?
• Underproduction
In a free market only private costs are considered:
• This would lead to underproduction and overpricing of this good, less is produced and sold at a higher price than is desirable for society.
What does the absence of property rights lead to?
- Production and consumption externalities, and market failure.
- Absence of property rights usually leads to the overuse of scarce resources and environmental damage.
How is market failure via property rights solved?
Extending property rights to account for externalities.
