Negative Externalities In Consumption

Question 1

Negative externalities

Answer 1

• These are third party effects arising from the consumption of goods and services for which no appropriate compensation is paid
• They cause market failure because the price mechanism does not consider the full social costs of consumption and fails to allocate resources efficiently
• The quantity consumed is too high and an externality is imposed on society

Question 2

Negative consumption externalities diagram

Answer 2

MPB = MC > MSB = MC - creates a social welfare loss because the market output consumed is higher than the social optimum

Question 3

Example 9 marker

Answer 3

Question 4

Social costs

Question 5

Market failure

Answer 5

Is the economic situation, defined by an inefficient distribution of goods and services in the free market.

Question 6

The existence of negative externalities in consumption results in a misallocation of resources.
This is because at the free market level of output the…

Answer 6

Marginal social benefit, is less than the marginal social cost.

Question 7

In a free market, the consumption of a good leads to negative externalities. If left to the free market, how would price and output compare to the social optimum?

Answer 7

The price and output would be higher
- (PB > SB)

Question 8

External costs

Answer 8

• Third party effects due to the consumption of a good for where no appropriate compensation is paid
• The amount consumed is too high, therefore a negative externality is imposed on society
• Where the social cost is greater than the private cost of consumption

Question 9

Social costs

Answer 9

Are the total costs imposed on society that have negative effects due to third party effects that are caused by the over consumption of goods and services.

Question 10

Smoking cigarettes generates negative consumption externalities.
This means that…

Answer 10

The social benefit from smoking is less than the private benefit