Negative externalities of consumption and production Flashcards
What is an externality??
A spillover effect of a decision- it incurs external costs and benefits of producing or consuming a good or service
the effect on third parties of production or consumption of a good
What happens to private and social costs in unregulated markets
They diverge/ separate, which is therefore market failure and government intervention is needed
What are negative externalities of consumption
The negative effects on third parties that occur from the consumption of a good by an individual
When do negative externalities of consumption occur?? (MPC and MSC)
When society pays a higher price than the individuals who is consuming the product. The marginal private cost is lower than the marginal social cost.
Why do negative externalities of consumption occur??
In a free market, people ignore the external costs of their actions and only consider the benefits they might gain eg from smoking. The difference between the MSC and MPC is the welfare loss to society of an individual’s actions.
How are negative externalities of consumption stopped??
Bringing the marginal private cost of an action like smoking to the same cost as the marginal social cost. the cost to an individual of buying a cigarette should equal the monetary cost of the external costs it creates, like increased NHS spending on treating lung diseases.
