Th1.3: Externalities

Question 1

What is an externality?

Answer 1

the cost or benefit to a third party receives from an economic transaction outside of the market mechanism

Question 2

What do externalities lead to?

Answer 2

over or under production of goods, meaning resources aren’t allocated efficiently

Question 3

Name something with a negative externality

Answer 3

cars or cigarettes

Question 4

Name something with a positive externality

Answer 4

education or healthcare

Question 5

Why is it difficult to work out the size of an externality?

Answer 5

tends to be placed on value judgements, since it is difficult to monetise external cost

Question 6

Why are many externalities involved with information gaps?

Answer 6

people are unaware of the full implications of their decisions