Externalities

Question 1

Deadweight loss

Answer 1

The loss in producer and consumer surplus due to an inefficient level of production perhaps resulting from market failure or government failure.

Question 2

External benefit

Answer 2

A benefit to a 3rd party agent arising from production and/or consumption.

Question 3

External cost

Answer 3

External costs are those costs faced by a third party for which no appropriate compensation is forthcoming. Identifying and then estimating a monetary value for air and noise pollution is a difficult exercise - but one that is important for economists concerned with the impact of economic activity on our environment.

Question 4

Externalities

Answer 4

Externalities are third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid.

Question 5

Marginal external benefit (MEB)

Answer 5

Benefit to third parties from the consumption of extra unit of output.

Question 6

Marginal external cost (MEC)

Answer 6

Cost to third parties from the production of an additional unit of output.

Question 7

Marginal private benefit (MPB)

Answer 7

Benefit to the consumer of consuming an extra unit of output.

Question 8

Marginal private cost (MPC)

Answer 8

Cost to the producing firm of producing an additional unit of output.

Question 9

Marginal social benefit (MSB)

Answer 9

Total benefit to society from consuming an extra unit.

Question 10

MSB formula Marginal social benefit

Answer 10

MSB = MPB + MEB.

Question 11

Marginal social cost (MSC)

Answer 11

Total cost to society of producing an extra unit of output.

Question 12

MSC formula Marginal social cost

Answer 12

MSC = MPC + MEC.

Question 13

Negative externality

Answer 13

Negative externalities occur when production and/or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid. This causes social costs to exceed private costs.

Question 14

Net social benefit

Answer 14

A measurement of the net impact of an investment project found by estimating the social costs and benefits. Net social benefit may be considered by a government when deciding which project(s) offers the best potential return for society.

Question 15

Positive externality

Answer 15

Positive externalities exist when third parties benefit from the spill-over effects of production/consumption e.g. the social returns from investment in education & training or the positive benefits from health care and medical research.

Question 16

Private benefit

Answer 16

The rewards to individuals, firms or consumers from consuming or producing goods and services. Also known as internal benefit.

Question 17

Private cost

Answer 17

Costs of an economic activity to individuals and firms. Also known as internal costs.

Question 18

Social benefit

Answer 18

The benefit of production or consumption of a product for society as a whole.

Question 19

Social benefit formula

Answer 19

Social benefit = private benefit + external benefit.

Question 20

Social cost

Answer 20

The cost of production or consumption of a product for society as a whole.

Question 21

Social cost formula

Answer 21

Social cost = private cost + external cost.

Question 22

Social effciency

Answer 22

The socially efficient output is where Social Marginal Cost (SMC) = Social Marginal Benefit (SMB).

Question 23

Spill-over effects

Answer 23

External effects of economic activity, which have an impact on outsiders who are not producing or consuming a product – these can be negative (creating external costs) or positive (creating external benefits).