1.3.2 (Externalities)

Question 1

What are Private Costs / Benefits?

Answer 1

• Costs / Benefits to the individual participating participating in the economic activity
• Demand Curve = Private Benefits
• Supply Curve = Private Costs

Question 2

What are Social Costs / Benefits?

Answer 2

The Costs / Benefits of the activity to society as a whole

Question 3

What are External Costs / Benefits?

Answer 3

• Costs / Benefits to a third party not involved in the economic activity
• They are the difference between private costs/benefits and social costs/benefits

Question 4

What is a merit good an example of?

Answer 4

• A good with external benefits, the benefit to society is greater than to the individual
• Tend to be under provided in the free market

Question 5

What is a demerit good an example of?

Answer 5

• A good with external costs, cost to society is greater to society than to the individual
• These tend to be over-provided in the free market

Question 6

What is Marginal Private Benefit (MPB) on a diagram?

Answer 6

extra satisfaction gained by the individual from consuming one more of a good

Question 7

What is Marginal Social Benefit (MSB) on a diagram?

Answer 7

extra gain to society from the consumption of one more good

Question 8

What is Marginal Private Cost (MPC) on a diagram?

Answer 8

extra cost to the individual from producing one more of the good

Question 9

What is Marginal Social Cost (MSC) on a diagram?

Answer 9

extra cost to society from the production of one more good

Question 10

What is a Negative Consumption Externality?

Answer 10

• When social costs are greater than private costs

- Market is left to operate freely and will ignore the external costs involved in producing a good

Question 11

What is a Positive Consumption Externality?

Answer 11

• When social benefits are greater than social costs

Question 12

How can gov intervene with Indirect taxes and subsidies?

Answer 12

• Taxes on goods with negative externalities and subsidies on goods with positive externalities
• Help to internalise the externalities and move production closer to social optimum

Question 13

How can gov intervene with Tradable pollution permits?

Answer 13

​These allow firms to produce up to a certain amount of pollution, and can be traded amongst firms so give them choice whilst reducing the total level of pollution.

Question 14

How can gov intervene with provision of the good?

Answer 14

​When social benefits are very high, the government may decide to provide the good through taxation. They do this with healthcare and education.

Question 15

How can gov intervene with provision of information?

Answer 15

ince some externalities are associated with information gaps, the government can provide information to help people make informed decisions and acknowledge external costs.

Question 16

How can gov intervene through regulation?

Answer 16

This could limit consumption of goods with negative externalities, for example banning advertising of smoking etc.