Externalities Flashcards
what is an externality
An externality arises when a person engages in an activity that influences the well-being of a bystander (a third party) who neither pays nor receives any compensation for that effect. If the impact on the bystander is adverse, it is called a negative externality; if it is beneficial, it is called a positive externality
two types of externalities
pos and neg
example of pos externalities
vaccines
education
research
example of neg externalities
car exhaust fumes
cigarettes
loud parties
how are loud parties not clear negative externalities compared to car exhuasts
third party view can vary eg might like party music
what happens if a market fails to consider externalities
inefficient decision making
free market produces too much negative externalities eg pollution
free market doesnt produce enough positive externalities eg research
what is the optimum point
price at which society is best off
what are social costs madeup of
private costs and external costs
what is internalising an externality
in order to recieve a socially optimum output
how can government externalise a negative externality
imposing a tax on the producer to reduce equilibrium quantity to a socially desirable quality
give regualtions and limitations
how can government externalise a positive externality
subsidise
examples of government subsidies
funding public transport
example of taxing neg externalities
carbon tax, polluters pay principle
plastic bag levy
how is right amount of tax to charge decided?
by ERSI
private solutions to externalities
moral codes and social codes eg littering
charitable organisations
contracting between parties
