Externalities

Question 1

How does market failure occur

Answer 1

When the free market fails to allocate scarce resources at the optimum level of output

Question 2

What is a negative production externality

Answer 2

Cost the 3rd parties as a result of the actions of production

Question 3

What is an example of a negative production externality

Answer 3

Air pollution
Deforestation
Resource depletion future generations suffer

Question 4

What is a negative consumption externality

Answer 4

Cost to 3rd parties as a result of the action of consumers

Question 5

What is a positive externality

Answer 5

Benefits to 3rd parties as a result of of the actions of consumers of producers

Question 6

What causes a positive externality in consumption

Answer 6

Self-interest
Under consumption/production
Misallocation of resources

Question 7

Give an example of a positive externality in consumption

Answer 7

Healthcare-vaccines
Education
Excersise
Healthy eating

Question 8

Give an example of a positive externality in production

Answer 8

In work training
R&D innovation
Both can benefit other firms

Question 9

What causes positive externality in production

Answer 9

Self interest only considering their private costs not other firms
Under-production at private optimum
Misallocation of resources so allocatively inefficient

Question 10

What causes negative externalities in production

Answer 10

Self-interest only consider private costs so don’t produce at social optimum
Price too low
Over production/consumption
Allocatively inefficient

Question 11

What causes negative externalities in consumption

Answer 11

Consumers only consider private benefit so self-interest
Over consumption
Therefore misallocation of resources