Positive and Negative externalities

Question 1

Why do externalities exist?

Answer 1

• This is because there is a divergence between private and social costs and benefits.

Question 2

What are externalities?

Answer 2

• The costs and benefits to a third party created by economic agents when undertaking their activities.
• These costs and benefits can be negative or positive.

Question 3

What are negative externalities?

Answer 3

• Costs to a third party that are not included in the price of the economic activity.

Question 4

What are positive externalities?

Answer 4

• Benefits to a third party that are not included in the price of the economic activity.

Question 5

What are private and social costs?

Answer 5

• Private costs are those costs of consuming or producing goods and services that have to be paid for by third parties like: the individual or a firm.
• Social costs are those costs of consuming or producing goods or services that are paid for by society.

Question 6

What are private benefits and social benefits?

Answer 6

• Private benefits are benefits of consuming or producing goods and services that are received by an economic unit.
• Social benefits are those benefits of consuming or producing goods and services that are received by society.

Question 7

What are merit goods?

Answer 7

• Goods that are under-consumed and under-provided in a free market.
• They provide greater social benefits than individuals consider in the private decision-making.

Question 8

What are demerit goods?

Answer 8

• People underestimate costs. Has negative externalities.