MF- Negative Externalities Flashcards
Externalities are
Third party effects- not on consumers or producers
Property rights…
Confer legal control or ownership. They are needed for markets to operate efficiently.
If an asset is unowned..
No one has an incentive to protect it from abuse
Tragedy of the commons
Failure to protect property rights can lead to tragedy of the commons e.g. over fishing
Private costs
The costs faced by the producer or consumer directly involved in a transaction
Social cost =
Private cost + external cost
The existence of externalities creates
A divergence between private and social costs of production and the private and social benefits of consumption
Negative consumption externalities
Social benefit of consumption is less than the private benefit
MPC
Cost to the producing firm of producing an additional unit of output
MEC
Cost to third parties from the production of an additional unit of output
MSC
Total cost to society of producing an extra unit of output MSC = MPC + MEC
MPB
Benefit to the consumer of consuming an additional unit of output
MEB
Benefit to third parties from the consumption of an extra unit of output
MSB
Total benefit to society from consuming an extra unit MSB = MPB + MEB
How can externalities be valued
- Shadow pricing (multiply the number of hours lost by the average wage)
- Compensation (the estimated cost of ‘putting right’ an externality)
- Revealed preference (how much people are willing to pay to avoid an externality)
