Externalities Flashcards
Market Failure Definition
failure of the market to achieve allocative efficiency resulting in an overallocation or underallocation of resources.
Marginal private costs (MPC) Definition
costs of production that are taken into account in a firm’s decision making process. The MPC curve is equal to the supply curve.
Marginal private benefits (MPB) Definition
benefits the individual enjoys from the consumption of an extra unit of a good. The MPB curve is equal to the demand curve.
Marginal social cost (MSC) Defintion
cost of production to society (benifit of supply)
Marginal social benefit (MSB) Defintion
benefit of consumption of one extra unit to society (benifit of demmand)
Negative externality of production on graph (welfare loss)
Positive externality of production graph (welfare gain)
Negative externality of production graph (welfare loss)
Positive Externality of consumption graph (welfare gain)
What are public goods?
They are non-rivalrous: more people can use the good at the same time e.g. a dam protects more people at the same time.
•They are non-excludable: people can’t be excluded from the use of the good e.g. in the case of a dam, people living in the protected area can’t be excluded from the protection by the dam.
Free rider problem
The consumer will not pay for a good which they can use anyway when someone else uses it. Non Exclusable goods.
Thus governments need to pay for these goods
What are common access resources
Non-excludable but rivalrous resources.
Often overused and depleted
How can government help with common access resources?
- Legislation
- Taxes
- Cap and Trade
- Subsidizing clean technology
Problems: If it is a global problem then co-operation with other governments is dificult
