T1: LS17 - Externalities Flashcards
Market failure definition
Refers to the misallocation of resources where too much/ too little is provided compared to the socially optimum level of output.
External costs
Refers to the costs to a third party not involved in the transaction (buying, selling and making of G&S)
External benefits
A benefit to a third party not involved in the transaction (producing, selling G&S)
Types of Market failure
P - Public goods: underprovision of public goods
I - Information gaps: causes over/ underproduction
E - Externalities: society is impacted
Externalities definition
Externalities: refer to the indirect costs or benefits to uninvolved third-parties or economic agents which occur from an economic activity. There is no compensation paid from this.
Public goods market failure definition:
Refers to the under provision of public goods because these are unprofitable. This causes a low quality of life since it is hard to finance this despite their benefits.
Information gaps
Refers to differences in the information supplied to the producers and consumers resulting in irrational decisions and misallocations in the quantity of goods and services produced.
Incur costs definitions
To experience a cost of something usually unpleasant due to actions which you have taken
Pareto efficiency defintion
Refers to a point/state in the economy where all economic agents needs are being met and the market has succeeded.
What are the two levels/ extents of market failure?
Complete market failure: occurs when the market cannot supply any of the goods and services needed.
Partial market failure: markets can provide G&S but this is underprovided/ overprovided or at the incorrect price.
Incur definition
To experience something usually unpleasant as a result of the actions that you or others may have taken resulting in a cost to you
Definition of a social benefit
Social benefit: refers to the total of the private benefits and external benefits impacting society
Define social costs
Social costs: private costs and external costs totalled
Negative externality definition
Negative externality: refers to the unintended third-party consequences which are incurred by economic agents who were not involved in the buying or selling transaction of a good or service. A negative externality occurs as the external costs outweigh the private costs. This is a market failure
Positive externality
Positive externality: refers to the unintended external benefits experienced by third-parties who were not involved in the buying or selling transaction of a good or service. A positive externality occurs as the external benefits outweighs private benefits and this is an example of market failure.
Why are G&S with negative externalities over consumed/ overproduced?
- Manufacturing the G&S results in large external costs
- Causes a deadweight loss as overuse/ overproduction creates larger costs for society and unintended consequences
- Reducing this would reduce the impacts on society making the G&Soverproduced/overconsumed
- Reducing this would correct externality
Why are G&S with positive externalities underconsumed/ underproduced
- Positive externalities mean G&S have larger external benefits
- Means producing or using them benefit society hence benefitting the economy’s growth etc
- Leads to possible net welfare gain as more consumption —> more benefits
- Therefore, underused as more use = more gain = more benefit
Social optimum level meaning
- Refers to the point at which the MSB and MSC are equal
Free market equilibrium
- refers to the level of costs/ benefits which occur as a result of the quantity naturally produced by the free market
MSB and MPB definitions
MSB: Marginal social benefits —> the benefit to society per unit of G&S produced
MPB: Marginal private benefits —> the additional benefit to firms per unit of G&S produced
MSC and MPC definitions
MSC: Marginal social benefits —> the additional costs to society per unit of G&S produced
MPC: Marginal private benefits —> the additional cost to firms per unit of G&S produced
What is a deadweight loss/ social net welfare loss for negative externalities
Deadweight loss: refers to the triangular area of costs to society that is created by a misallocation of resources
What is deadweight loss/ social net welfare loss for positive externalities
Deadweight loss: refers to the loss of potential benefits which has occurred from misallocation of resources
How is the deadweight loss drawn for a positive externalities & negative externalities
- Positive: points towards social optimum to the right —> (left to right)
- Negative: points towards social optimum on the left —> (right to left)
