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Economics 11.4 > Externalities - Positive > Flashcards

Flashcards in Externalities - Positive Deck (10)
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what is an externality

a side effect/consequence of economic activity created by the production/consumption of a good


why are these SIDE effects not direct effects

the market only captures thr private costs/benefits of production/consumption - but their are external effects


what happens when these externalities exist

market outcome won't be efficient
market will fail to set the correct price and fail to produce the socially optimal quantity


what is a positive externality

creates an external benefit that spills over from the private transaction to the thrid party


who benefits (1st, 2nd,3rd) from a pos externality using the example of a gym membership (a gym membership gives consumers the right to use equip and get expert advice to improve fitness

1st and 2nd - buyer and seller
3rd : members employers (healthy work is more productive)


who benefits (1st, 2nd,3rd) from a pos externality using the example of a HECS loan (student has to pay to enter uni, it can be payed up front or loan)

1st and 2nd - student (higher salary with degree) and uni (get money)
3rd - society gets a skilled and productive workforce


On the demand curve what do Dp and Ds represent and where is the efficient equilibrium (DRAW GRAPH)

Dp = private demand curve representing private benefit
Ds = social demand curve representing overall benefit
eql = Ds and Supply


why is a positive externality still failing the market

the market fails in the presence of a pos externality due to underproduction (quantity < efficiency quantity)
if mkt considered ext = no mkt fail


is there dead weight loss

yes - there is a decrease in total surplus


social benefit =

private benefit + external benefit