Positive and negative externalities in consumption and production

Question 1

define externalities

Answer 1

the cost or benefit a third party receives from an economic transaction outside of the market mechanism

Question 2

define negative externalities

Answer 2

costs which affect third-partiesoutsidethe price mechanism the transaction that takes place directly between consumers and producers) - negative effects on others

Question 3

define negative consumption externalities

Answer 3

costs that effect third parties as a result of the consumption of a good

Question 4

define positive production externalities

Answer 4

costs that effect third parties as a result of the production of a good

Question 5

what can negative externalities be referred to as

Answer 5

external costs

Question 6

what are negative externalities caused by

Answer 6

demerit goods

Question 7

inside the price mechanism, what two things are there

Answer 7

private costs and private benefits

Question 8

define private costs

Answer 8

the cost of supplying for the producer

Question 9

define private benefits

Answer 9

the benefits enjoyed by the costumers

Question 10

outside of the price mechanism, what do we find and state who is affected by this

Answer 10

external costs or negative production externalities - the rest of society is affected

Question 11

define social cost

Answer 11

all the costs experienced by society - private costs and (external costs) price benefits - added together

Question 12

define social benefits

Answer 12

all the befits experienced by society - societal benefits and (external benefit) private benefits - added together

Question 13

state what social costs are equal to

Answer 13

societies costs

Question 14

state what social benefits are equal to

Answer 14

Society’s benefits

Question 15

state what marginal cost is equal to

Answer 15

marginal private cost (MPC)

Question 16

state what marginal benefit is equal to

Answer 16

marginal private benefit (MPB)

Question 17

what is the socially optimum level

Answer 17

This is where MSC = MSB and it is the point of maximum welfare.

Question 18

Why does the absence of property rights leads to externalities in both production and consumption and hence market failure

Answer 18

Markets become inefficient where there are no property rights.
- This means that free-riders can have unlimited access, which results in the exploitation of the good = overuse or exploited