Externalities - Negative Flashcards
When do negative externalities occur
when economic actions from either production/consumption create an external cost
what does this do to the market
market quantity will be greater than the optimal quantity and will cause price to be less than optimal price
how is driving to work a private descision
it is a private descision made by people by weighing up costs/benefits that accrue to them as individuals
describe the private cost/benefit of driving to work at peak time
cost of petrol, time taken for trip, convenience of having car at work, no need to walk to bus
describe the external cost/benefit of driving to work at peak time
imposes costs on other drivers: extra cars add to congestion experienced by all drivers creating an external cost on others
air pollution
describe the private cost/benefit of a factory polluting the world
factory have cheaper way of production (the atmosphere is free)
describe the external cost/benefit of factories polluting
the health of the people living in the area
On the graph what do D, Sp, Qm/Pm, Ss means
where is efficient (DRAW GRAPH)
D = benefits of consumption Sp = private cost of production Qm/Pm = if only private costs were taken into account Ss = social supply curve where Ss meets D creating Qe and Pe
does the market fail? is there DWL
yes - due to overproduction - market quantity > efficient quantity there is DWL (decrease in total surplus)
how can negative externalities be eliminated
if producers payed for external cost there would be no ext and no mkt failure
Social Cost = =
private cost + external cost
