1.3.2 Externalities Flashcards
(13 cards)
What is an externality?
The unintended side effects or consequences of an economic activity or transaction
Give an example of a negative production externalities
Factory pollution
Give an example of a negative consumption externalities
Houshold waste
Noise
Give an example of a positive production externalities
Reforestation
Give an example of a positive consumption externalities
Vaccinations
How can externalities cause market failure?
They disrupt the efficient functioning of markets
What are private costs?
The internal costs faced by the producer or consumer directly involved in a transaction
What is the marginal private cost?
The cost to a firm of producing/supplying an extra unit of output
What is the marginal private benefit
The extra benefit, satisfaction or utility gained by a consumer or producer through consuming/producing one extra unit of a good/service
What is the marginal external cost?
Cost to third parties from the production/consumption of an extra unit of output
What is the marginal social cost
total cost to society arising from the producing/consuming an extra unit of output
How do you calculate marginal social cost?
MPC + MEC = MSC
What are positive externalities
When third parties benefit from the spill over of consumption, social benefits will exceed private benefits
