4.1.8.4 Positive and Negative Externalities Flashcards
(15 cards)
Externality Definition
The costs and benefits to a third party created by economic agents when undertaking their activities.
Positive Externality
Benefits to a third party that are not included in the price of the economic activity.
Negative Externality
Costs to a third party that are not included in the price of the economic activity.
Private Costs
The costs of consuming or producing goods or services that are paid for by the one doing it.
Social Costs
The costs of consuming or producing a good that are paid for by society.
Private Benefits
The benefits of consuming or producing goods or services that are gained by the one doing it.
Social Benefits
The benefits of consuming or producing goods or services that are gained by society.
Draw Negative Production Externality Diagram
Split MPC and MSC, with MSC>MPC
D = MPB = MSB
Negative Production Externality Definition/Cause
Overproduced if left to the free market. When the activities of producers lead to costs to a third party that are not included in the price of the activity e.g. Gas Power Station
Draw Negative Consumption Externality Diagram
Split MPB and MSB, with MPB>MSB
S = MPC = MSC
Negative Consumption Externality Definition/Cause
Over consumed if left to the free market. When the activities of consumers lead to a loss of benefit to a third party that are not included in the price of the economic activity e.g. Smoking Cigarettes
Draw a Positive Production Externality Diagram
Split MPC and MSC, with MPC>MSC
D = MPB = MSB
Positive Production Externality Definition/Cause
Underproduced if left to the free market. When the activities of producers lead to benefits for a third party that are not included in the price of the economic activity e.g. Smell from a Bakery of freshly baked bread
Draw a Positive Consumption Externality Diagram
Split MPB and MSB, with MSB>MPB
S = MPC = MSC
Positive Consumption Externlaity Definition/Cause
Underconsumed if left to the free market. When the activities of consumers lead to benefits to a third party that are not included in the price of the economic activity e.g. Using Solar Panels
