Externalities - Positive Flashcards
what is an externality
a side effect/consequence of economic activity created by the production/consumption of a good
why are these SIDE effects not direct effects
the market only captures thr private costs/benefits of production/consumption - but their are external effects
what happens when these externalities exist
market outcome won’t be efficient
market will fail to set the correct price and fail to produce the socially optimal quantity
what is a positive externality
creates an external benefit that spills over from the private transaction to the thrid party
who benefits (1st, 2nd,3rd) from a pos externality using the example of a gym membership (a gym membership gives consumers the right to use equip and get expert advice to improve fitness
1st and 2nd - buyer and seller
3rd : members employers (healthy work is more productive)
who benefits (1st, 2nd,3rd) from a pos externality using the example of a HECS loan (student has to pay to enter uni, it can be payed up front or loan)
1st and 2nd - student (higher salary with degree) and uni (get money)
3rd - society gets a skilled and productive workforce
On the demand curve what do Dp and Ds represent and where is the efficient equilibrium (DRAW GRAPH)
Dp = private demand curve representing private benefit Ds = social demand curve representing overall benefit eql = Ds and Supply
why is a positive externality still failing the market
the market fails in the presence of a pos externality due to underproduction (quantity < efficiency quantity)
if mkt considered ext = no mkt fail
is there dead weight loss
yes - there is a decrease in total surplus
social benefit =
private benefit + external benefit
