Externalities Flashcards
Negative production externalities
When the production of a gd/service has an adverse impact on a 3rd party outside the market mechanism
MPC > MSC, overallocation of resources as producer fails to consider external costs
Positive consumption externalities
When the consumption of a gd/service have a benefit to a third party outside the market mechanism
Social benefits of consumption exceed private benefits
Private costs
Cost of doing something to either the producer or the consumer
Private costs of a producer
Wages, rent, raw materials
Private costs for a consumer
The price paid for the product or service
What are social costs
Private costs + external costs, cost of doing something to society
Social benefits=
Private benefits + external benefits, so then
external benefits = social benefits - private benefits
What are externalities
Effects of producing/ consuming a gd/service has on ppl who aren’t directly involved in the market (3rd parties)
Policies to tackle negative consumption externalities
Add tax so producer internalises externality
Info provision
Personal carbon allowances (traceable, so ppl can pollute up to a certain amount and trade what they don’t use)
Evan negative externality policies
Tax won’t work if gd is inelastic, v hard to measure externality (eg pollution)
Policies to correct positive consumption externalities
Subsidies, which lower costs of prod so increase S
Gov provision for public merit gds
Info provision
Regulation eg min school leaving age
Eval positive consumption externalities policies
Size of subsidy relative to externality (which is difficult to measure), if p inelastic then less effective, if firms get reliant on subsidy they’ll be inefficient, OC- can the government spend money better elsewhere
