Externalities Flashcards
(23 cards)
Deadweight loss
The loss in producer and consumer surplus due to an inefficient level of production perhaps resulting from market failure or government failure.
External benefit
A benefit to a 3rd party agent arising from production and/or consumption.
External cost
External costs are those costs faced by a third party for which no appropriate compensation is forthcoming. Identifying and then estimating a monetary value for air and noise pollution is a difficult exercise - but one that is important for economists concerned with the impact of economic activity on our environment.
Externalities
Externalities are third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid.
Marginal external benefit (MEB)
Benefit to third parties from the consumption of extra unit of output.
Marginal external cost (MEC)
Cost to third parties from the production of an additional unit of output.
Marginal private benefit (MPB)
Benefit to the consumer of consuming an extra unit of output.
Marginal private cost (MPC)
Cost to the producing firm of producing an additional unit of output.
Marginal social benefit (MSB)
Total benefit to society from consuming an extra unit.
MSB formula Marginal social benefit
MSB = MPB + MEB.
Marginal social cost (MSC)
Total cost to society of producing an extra unit of output.
MSC formula Marginal social cost
MSC = MPC + MEC.
Negative externality
Negative externalities occur when production and/or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid. This causes social costs to exceed private costs.
Net social benefit
A measurement of the net impact of an investment project found by estimating the social costs and benefits. Net social benefit may be considered by a government when deciding which project(s) offers the best potential return for society.
Positive externality
Positive externalities exist when third parties benefit from the spill-over effects of production/consumption e.g. the social returns from investment in education & training or the positive benefits from health care and medical research.
Private benefit
The rewards to individuals, firms or consumers from consuming or producing goods and services. Also known as internal benefit.
Private cost
Costs of an economic activity to individuals and firms. Also known as internal costs.
Social benefit
The benefit of production or consumption of a product for society as a whole.
Social benefit formula
Social benefit = private benefit + external benefit.
Social cost
The cost of production or consumption of a product for society as a whole.
Social cost formula
Social cost = private cost + external cost.
Social effciency
The socially efficient output is where Social Marginal Cost (SMC) = Social Marginal Benefit (SMB).
Spill-over effects
External effects of economic activity, which have an impact on outsiders who are not producing or consuming a product – these can be negative (creating external costs) or positive (creating external benefits).
