Y12 Booklet 3: Externalities Flashcards
What is an externality?
A cost/benefit for a third party (someone not involved in the economic transaction, i.e. buyer/seller) which has not been compensated for
What is a negative externality?
A cost to a third party
What is a positive externality?
A benefit to a third party
What does Marginal mean?
The effects of increasing by one unit
What does Marginal Private Cost (MPC) mean?
The cost to those directly involved (i.e. consumer/producer) of one additional unit
What does Marginal Private Benefit (MPB) mean?
The benefit to those directly involved (i.e. consumer/producer) of one additional unit
What does Marginal External Cost (MEC) mean?
The cost to third parties (i.e. not consumer/producer) of one additional unit
What does Marginal Social Benefit (MSB) mean?
The benefit to society as a whole of one additional unit
MSB = MPB + MEB
What does Marginal External Benefit (MEB) mean?
The benefit to third parties (i.e. not consumer/producer) of one additional unit
What does Marginal Social Cost (MSC) mean?
The cost to society as a whole of one additional unit
MSC = MPC + MEC
What does Private/Free-Market Optimum (PO/FM) mean?
The quantity consumed/produced in a free-market
Where MPB = MPC
Where profit is maximised
What does Social Optimum (SO) mean?
The quantity consumed/produced which is most beneficial for all of society
Where MSB = MSC
Where producers/consumers account for all externalities, impossible
What does Welfare Loss/Dead-Weight Loss (DWL) mean?
The cost to society caused by misallocation of resources
What is the graph for Negative Externality of Production?
What is the graph for Positive Externality of Production?
What is the graph for Negative Externality of Consumption?
What is the graph for Positive Externality of Consumption?
Why is MPB = MSB on an Externality of Production diagram?
There is no impact on consumers, so MEB = 0
Why is MPC = MSC on an Externality of Consumption diagram?
There is no impact on producers, so MEC = 0
