mid term 2 Flashcards
two types of negative externalities
production and consumption externalities
negative production externalities
negative production externalities arise when a firms production reduces the well being of others who are not compensated by the firm
negative consumption externality
negative consumption externalities when an individuals consumption reduces the well being of other who are not compensated by the individual
private marginal cost
the direct costs to produces of producing an addition unit of a good
social marginal costs
social marginal costs are private marginal costs to producers plus any costs associated with the production of the good that are imposed on others
what do negative production externalities do?
drive a wedge between private marginal costs and social marginal costs
what do negative consumption externalities do
drive wedge between private marginal benefit and social marginal benefit
private marginal benefits
private marginal benefits are the direct benefits to the consumer for consuming an additional unit of a good
social marginal benefits
the social marginal benefit is the private marginal benefit to the consumer for consuming a unit of the good minus the costs associated with the consumption of the good that are imposed on others
how do externalities affect efficiency
efficiency requires that SMB=SMC, the market sets PMC=PMB, when PMC=SMC and PMB=SMB the market is efficient
will your social marginal cost be greater than private marginal costs or less than if you have a negative production externality
if you have a negative production externality it causes your social marginal cost to be greater than your private marginal cost shifting your supply curve up creating dead weight loss
will your social marginal benefit be greater than or less than your private marginal benefit you have negative consumption externality?
your social marginal benefit will be below your private marginal benefit if you have negative consuption externality because you subtract your marginal demand
positive production externality
positive externalities arise when a firms production increases the well being of other but the firm is not compensated
positive consumption externality
a positive consumption externality arises when an individuals consumption increases the well being of other but the individual is not compensated
what do you get with positive production externalities
you get a social marginal cost that is less than private marginal cost which leads to underproduction
what do taxes and subsidies do for externalities
taxes and subsidies change the private marginal cost or marginal benefit without affecting the social marginal cost of benefit
what are taxes that correct externalities called
pigouvian taxation
what do you set the tax equal to when internalizing the externality of negative production externality
set the tax equal to the marginal damage, a tax will push up PMC to equal SMC
corrective subsidies
subsides are a solution to positive production externalities which shifts the curve back down reducing private marginal cost to make it equal to the SMC curve
