What is an externality?
The cost or benefit a third party receives from an economic transaction outside of the market mechanism
What are private costs/benefits?
The costs/benefits to the individual participating in the economic activity
What are social costs/benefits?
The costs/benefits of the activity to society as a whole
What are external costs/benefits?
The costs/benefits to a third party not involved in the economic activity
How do you calculate social costs?
Private costs + external costs
What is marginal social cost
The addition to cost of producing an extra unit of output
What is marginal social benefit?
The addition to total benefits of consuming an extra unit
What is marginal private benefit?
Benefit to the consumer of consuming an additional unit of output
What is marginal external benefit?
Benefit to third parties from the consumption of an additional unit of output
Why is it hard to put a price on externalities?
It is difficult to work out the size of the externality
What are the government policies for externalities?
-Indirect taxes
-subsidies
-regulation
-tradable pollution permits
-provision of the good
-provision of information
Why are indirect taxes useful for externalities?
It reduces the amount of demerit goods consumed and produced as prices increase
Why are subsidies useful for externalities?
They encourage the consumption of merit goods
Why is regulation useful for externalities?
It limits consumption of goods with negative externalities, like banning advertising of smoking
Why are tradable pollution permits useful for externalities?
Allows firms to use up to a certain amount of pollution
Why is provision of the good useful for externalities?
When social benefits are high, the gov may provide the good through taxation, e.g. healthcare and education
Why is provision of information useful for externalities?
Some externalities are associated with information gaps, so the gov can provide info to help people make informed decisions and acknowledge external costs
What are some examples of negative externalities of production?
Air pollution, resource depletion, deforestation
What are some examples of negative externalities of consumption?
Smoking, excessive alcohol, excessive fast food
What are some examples of positive externalities of consumption?
Healthcare, education, exercise, healthy eating
Where does the social welfare triangle always point to?
The social optimum
What are some examples of positive externalities of production?
In work training, research+development
What is an example of a negative externality by BP?
In 2010, an underwater BP well spilled over 35,000 barrels of oil in the Gulf of Mexico
What did the BP oil spill lead to?
Damage to the shorelines of American states, so $700 million lost in fishing and tourism revenues
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1.1- Nature Of Economics76
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1.1.6- Economic Systems23
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1.2.1- Rational Decision Making7
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1.2.2- Demand22
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1.2.3- Price, Income And Cross Elasticities Of Demand40
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1.2.4- Supply7
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1.2.5- Elasticity Of Supply11
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1.2.7- Price Mechanism5
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1.2.9- Indirect Taxes And Subsidies17
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1.2.10- Alternative views of consumer behaviour8
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1.3.1- Types Of Market Failure14
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1.3.2- Externalities40
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1.3.3- Public Goods8
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1.3.4- Information Gaps8
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1.4.1- Government Intervention In Markets40
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1.4.2- Government Failure8
