Negative Externalities In Production

Question 1

Negative production externalities

Answer 1

• These are third party effects arising from the production of goods and services for which no appropriate compensation is paid
• ** Marginal cost to society is greater than marginal private cost (MSC > MPC)**
• As a result the quantity consumed is too high and an externality is imposed on society

Question 2

Negative production externalities

Answer 2

Question 3

Private costs

Answer 3

Are the costs faced by the producer or directly involved in the transaction

Question 4

Social cost

Answer 4

= Private cost + external cost

Question 5

Damage to third parties

Answer 5

External costs damage third parties, but the consumer and producer don’t have to pay, meaning that output will be too high. In production externalities the market price, therefore will be too low.