Externalities

Question 1

What is an externality?

Answer 1

An externality is an affect on a third party caused by the actions on another.
-Suppliers create externalities in production
-Consumers create externalities in consumption

Question 2

What is a Marginal Private Cost ?

Answer 2

Marginal private cost is the cost to an individual of consuming one extra unit.

Question 3

What is Marginal Private Benefit ?

Answer 3

Marginal private benefit is the benefits to an individual of consuming one extra unit.

Question 4

What is the Marginal External Cost?

Answer 4

The marginal external costs are the bad things to a third party of an individual consuming one extra unit.

Question 5

What is Marginal external benefit?

Answer 5

Marginal external benefits are the good things/ benefits to a third party of an individual consuming one extra unit.

Question 6

How do you calculate Marginal Social Cost?

Answer 6

Marginal social cost= Marginal private cost + Marginal external cost

Question 7

How do you calculate Marginal social benefit?

Answer 7

Marginal social benefit= Marginal private benefit+ Marginal external benefit

Question 8

Difference between negative and positive externality?

Answer 8

For a negative externality MSC is greater then MSB
For a positive externality MSB is greater then MSC

Question 9

What is government failure?

Answer 9

Government failure is when government intervention leads to a worsening of resource allocation (costs of a policy outweighs benefit) .

Question 10

What are the types of Government failure?

Answer 10

I- Inadequate information
C-Financial cost/ opportunity cost
A- Administrative errors
U- Unintended consequences
S-Self -Interest
E-(Lack of) Expertise

Question 11

What is information failure?

Answer 11

When information is inaccurate, incomplete, uncertain or misunderstood so we make the wrong decision

Question 12

What are the types of information failure?

Answer 12

-Misunderstanding the true costs or benefits of a product
-Uncertainty of costs or benefits
-Complex information
-Inaccurate or misleading information
-Addiction

Question 13

What is asymmetric information?

Answer 13

Asymmetric information is when the supplier knows more then the consumer.
-They will likely overcharge or get you to overuse it

Question 14

What is a moral hazard?

Answer 14

A moral hazard is when some form of insurance leads to someone taking unnecessary risks

Question 15

What are private goods?

Answer 15

Private goods are goods that are rival and excludable

Question 16

What are public goods?

Answer 16

Public goods are goods that are both non rival and non excludable
-E.g. roads, streetlights and flood defenses
-Governments provide these as no one else will

Question 17

What are Quasi goods?

Answer 17

Quasi goods are goods that are non rival up to a certain point.
-E.g. congestion of roads, limited NHS ambulances

Question 18

What is the free rider problem?

Answer 18

The free rider problem is that people are benefiting from something without paying for it.

Question 19

What is tragedy of the commons?

Answer 19

Tragedy of the commons is the overuse of a common resource
-E.g. fishing in the seas

Question 20

What is Minimum price?

Answer 20

Minimum price is something set by the government. This creates excess supply due to profit motive.

Question 21

What is maximum price?

Answer 21

Maximum price is something set by the government on a good. This creates excess demand

Question 22

What is economies of scale?

Answer 22

Economies of scale arise when costs per unit falls as output increases.

Question 23

How to calculate average costs?

Answer 23

Average cost= total costs/ units produced

Question 24

How to calculate total costs?

Answer 24

Total costs= fixed costs + variable costs

Question 25

What is minimum efficiency scale (MES)?

Answer 25

The minimum efficiency scale is the lowest cost a firm can get.

Question 26

What are internal economies of scale?

Answer 26

Internal economies of scale arise from the increased output of the business itself

Question 27

What are external economies of scale?

Answer 27

External economies of scale arise when the market grows in size

Question 28

What are the types of internal economies of scale?

Answer 28

-Purchasing economies: the more you buy the less it costs per unit. -Technical: you can buy more and better quality machinery. -Marketing: Able to advertise at a bigger scale and bigger audience -Network: The bigger the company gets the more connections you have. -Financial: You can get bigger loans at a lower interest the bigger you are

Question 29

What are diseconomies of scale?

Answer 29

Diseconomies of scale are factors which allow the average production cost per unit of a business to increase above the efficient level -As output grows, costs grow past the MES level

Question 30

What are increasing returns to scale?

Answer 30

This is when your outputs increase more then your inputs

Question 30

What are constant returns to scale?

Answer 30

This is when your outputs go up by the same amount as your inputs

Question 31

What are decreasing returns to scale?

Answer 31

This is when your outputs go up by less then your inputs