Externalities Flashcards
What is an externality
when the production or consumption of a good/service has an impact on a third party not involved in producing or consuming the good/service
What is a Marginal Private Cost
The additional cost to a firm from producing an extra unit of output
What is a Marginal Social Cost
Additional costs to society from an increase of production by a firm
What is a Marginal Private Benefit
The additional welfare to the consumer for consuming more of a good
What is a Marginal Social Benefit
Additional welfare to society from increased consumption of a good
What is a negative production externality
MSC > MPC
When the marginal social costs are much higher than the marginal private costs to the business
What is a negative consumption externality
MPB > MSB
When the marginal private benefit is bigger than the marginal social benefits
What is a positive production externality
MSC < MPC
When the marginal social costs are smaller than the marginal private costs to the business
What is a positive consumption externality
MSB > MPB
When the marginal private benefit is smaller than the marginal social benefits
Examples of negative production externalities
Pollution (noise, water, air)
Traffic congestion
Noise
Loss of biodiversity
What policies are there to correct Negative Production Externalities
Indirect tax,
Tradable permits,
Regulation/legislation
Minimum prices
Examples of positive consumption externalities
Vaccinations
Personal hygiene products
Education
Policies to correct positive consumption externalities
Subsidy,
Direct provision
Information campaigns
Evaluation of effectiveness of tax on externalities
Depends on: Ease of measuring the externality PED + magnitude of the tax How well the tax can be targeted Political will of Gov. What is being taxed (pollution or output)
Evaluation of effectiveness of Regulation on externalities
Depends on:
Appropriate level of regulation (right balance)
Cost to firms of meeting the regulations
Impact on international competativeness
