1.3.2 Externalities Flashcards
What is an Externality?
An Externality is when there is an external impact on a third party not involved in the economic transaction.
What is a private benefit?
A private benefit for the consumer is what they actually get from consuming a good/service.
When do positive externalities occur?
Positive externalities occur when the social benefits of an economic transaction are greater than the private benefits.
What is the formula for social benefits?
Social benefits = Private benefits + External benefits
What is a positive externality?
a benefit received or transferred to a party as an indirect effect of the transactions of another party
What is a negative externality?
The damage not factored into the economic activity.
When do negative externalities occur?
When the social costs are greater than the private costs.
What is the formula for social costs?
Social costs = Private costs + External costs (negative externality)
What is a private cost?
A private cost for the producer/consumer is what they actually pay to produce/purchase a good/service.
What is the Marginal Private Cost (MPC)?
The cost of the next unit produced or consumed.
What is the Marginal Private Benefit (MPB)?
The benefit derived from the production of consumption of the next unit.
What are externalities a form of?
Externalities are a form of market failure.
Why is the market failing due to demerit goods?
Due to the over-provision of these goods/services as only the private costs are considered by the producers.
