1.3.2 Flashcards
(26 cards)
What are externalities?
Spill-over effects from production/consumption for which no appropriate compensation is paid to one or more third parties affected.
Externalities are impacts on?
‘Third parties’ as a result of a market transaction
Why are externalities not reflected in the market price?
They lie outside the initial market transaction
How do externalities cause market failure?
If the price mechanism does not take account of the full social costs and benefits of production and consumption
What are private costs?
The costs faced by the producer or consumer directly involved in a transaction
What are external costs?
The costs imposed on third parties as a result of a transaction that they are directly involved in
What is the equation for social costs?
Social costs = private costs + external costs
When negative production externalities exist what dies this mean for social costs?
Social costs exceed private costs
How do external costs damage third parties?
The consumer and producer don’t have to pay, output will be too high, the market price will be too low.
What are examples of negative externalities from production?
-Air pollution from factories
-Pollution from fertilisers
-Industrial waste
-Noise pollution
-Collapsing fish stock
-Methane emissions
What are the ways economists believe that externalities can be valued?
Shadow pricing
Compensation
Revealed preference
Marginal private cost(MPC)?
Cost to the producing firm of producing an additional unit of output to an individual of an economic action
Marginal external cost (MEC)?
Cost to third parties from the producing of an additional unit of output
Marginal social cost (MSC)?
Total cost to society of producing an extra unit of output
What is the equation for marginal social cost?
Marginal private cost + marginal external cost
When do positive externalities exist?
When third parties benefit from the spill-over effects of production/cosnumption.
What is an example of a positive externality?
The social returns from investment in training
What is a private benefit?
The benefits faces by the producer or consumer directly involved in a transaction.
What are external benefits?
The benefits enjoyed by third parties as a result of a transaction that they are not directly involved on
What is the equation for social benefit?
Social benefits = private benefit + external benefit
When positive (consumption) externalities exist what happens to social benefit?
Social benefits exceed private benefits
Why are external benefits good for third parties?
The consumer and produced don’t take this into account, meaning that output will be too low. The market price will be too high.
Marginal private benefit (MPB)?
The benefit to the consumer of consuming an additional unit of output
Marginal external benefit (MEB)?
Benefit to third parties from the consumption of an additional unit of output
