Externalities

Question 1

Externality def. 3

Answer 1

The impact of an economic transaction on a 3rd party not involved in the transaction

Negative externality - when social costs are greater than private costs

Positive externality - the social benefits are better than the private benefits

Question 2

Private costs/benefits def.

Answer 2

costs or benefits to those involved in the economic transaction

Question 3

Negative Externalities

Answer 3

The costs born by a 3rd party who is not a producer nor consumer of the good e.g. when farmers use fertilizer and it can pollute the water of lakes and rivers. This water must then be treated before being used, which raises everyone’s water bills (negative production cost) Negative consumption cost = Cost of treating those w diseases resulting from smoking to tax payers

Tend to be caused by demerit goods which are overproduced

Question 4

Positive Externalities

Answer 4

The benefits enjoyed by a 3rd party who is not the producer nor consumer. e.g. HS2 will relieve overcrowding one existing train services, which benefits users of those services

Caused by merit goods, often underproduced

Question 5

Negative externalities diagram

Answer 5

Question 6

Positive externalities diagram

Answer 6

Could be a vaccination - Those who do not get the vaccine can still benefit from it as they are at lower risk of catching it, economy may be better as less people off work