Negative Externalities

Question 1

What are negative externalities of production?

Answer 1

Refer to spillover costs to society as a consequence of the production of a particular good/service

Question 2

What is an example of negative externalities of production?

Answer 2

Cement Factory

• air pollution
• affecting ecosystem in nearby waterbodies
• dislocating locals and/or affecting their natural resources (such as water bodies and land space)

Question 3

What are negative externalities of consumption?

Answer 3

Refer to spillover costs to society as the consequence of the consumption of a particular good/service

Question 4

What is an example of negative externalities of consumption?

Answer 4

Alcohol consumption

• drunk driving = accidents
• domestic abuse
• loss of productivity

Question 5

What causes welfare loss in the case of negative externalities?

Answer 5

Welfare loss is caused in the case of negative externalities as the cost to society is greater than the benefit derived from the society. This is demonstrated through MSC > MSB at point of production, which demonstrates an overallocation of resources towards the good/service

Question 6

What are demerit goods?

Answer 6

Goods such as alcohol and cigarettes, which are undesirable for consumers but are overproduced in a free market