Micro:1.3.2 Externalities Flashcards
What are external costs?
External costs (negative externalities) exist when the social costs of an economic action are greater than the private costs.
What is an example of external costs?
A chemical manufacturer may impose costs on third parties, such as noise from delivery lorries, an ugly factory affecting local residents, and pollution in the river.
Example: A factory’s operations may lead to environmental degradation affecting the community.
What is the formula for social costs?
Social costs = private costs + external costs.
What are external benefits?
External benefits (positive externalities) exist when the social benefits of an economic action are greater than the private benefits.
What is an example of external benefits?
A child’s education may provide a private benefit by enabling them to earn a reasonable income, while also benefiting society if they become a doctor.
Example: A doctor treats patients, allowing them to return to work, benefiting the economy.
What is the formula for social benefits?
Social benefits = private benefits + external benefits.
What should students focus on when drawing diagrams related to externalities?
Students should accurately label the market equilibrium, social optimum, and welfare loss.
Draw a digram for negative external costs
Draw a digram for postive external cots
