Externality Flashcards
externality
the direct effect of the actions of a person or firm on another persons wellbeing or a firms production capability rather than an indirect effect through changes in prices
negative
that harms someone
positive
that benefits others
private cost
the cost of production not including externalities
social cost
private cost + cost of harms from externality
private benefit
the benefit of production not including externality
social benefit
private benefit + benefit of externalities
draw the graph
negative
draw the graph
positive
net welfare loss (n)
MSC>MSB
net welfare loss (p)
MSB>MSC
positive externality
benefit enjoyed by a 3rd party (free riders)
merit goods
healthcare, education, for example skill and knowledge learnt in university can benefit the wider community / workforce
coase theorem
the optimal levels of pollution and output can result from bargaining between polluters and their victims if property rights are clearly defined–gravitating towards the most efficient and mutually beneficial outcome
property rights
if there are two firms one causing a negative externality and therefore affecting the production of the other firm - can be granted with a property right, setting a fair level making both companies profits and not damaging the others
public goods
a commodity of service whose consumption by one person does not preclude the others from consuming it
produces a POSITIVE EXTERNALITY; excluding anyone from consuming it is inefficient
rivalry
only one person can consume the good
exclusion
means that others can be prevented from consuming the good
FREE ACCESS
the internet, roads, NHS
free rider problem
the benefit from consuming without paying - taking advantage of provision e.g. public goods consuming without paying your share in tax
value of public goods
surveys and voting results
reducing externalities
Kyto agreement - a treaty that sets a quota on the amount of CO2 emissions (greenhouse gasses) based on if global warming exists, and human made CO2 emissions have caused it
