Negative Externalities

• What is a negative externality?

  A cost to a third party.
• What is an external cost?

  A cost to a third party.
• What is a private cost?


  A cost to the producer.
• What equals a social cost?

  External cost+Private cost=social cost
• What are some examples of private costs in a cheese factory?

  • wages
  • buying land
  • transport
• What are some examples of external costs in a cheese factory?

  • house prices decreasing
  • infrastructure (visual pollution)
  • mice
  • air pollution
• What does marginal mean?

  One more
• What is Marginal Private Cost (MPC)?

  Cost to the producing firm of producing an extra unit of output.
• What is Marginal External Cost (MEC)?

  Cost to third parties from the production of an additional unit of output.
• What is Marginal Social Cost (MSC)?

  Total cost to society of producing an extra unit of output.

  MPC+MEC=MSC
• Describe negative externality in terms of social costs and private costs?

  Social costs>private costs
• Does negative externality relate to consumption or production on the diagram?

  Production
• On the negative externality diagram, where is Q1 and Q2 on the y-axis usually?

  Q1 on the left and Q2 on the right
• On the negative externality diagram, what lines meet to make the social optimum equilibrium?

  Marginal Social Benefit = Marginal Social Cost
• On the negative externality diagram, is the social optimum equilibrium usually on Q1 or Q2 equilibrium?

  Q1
• On the negative externality diagram, is the free market equilibrium usually on the Q1 or Q2 equilibrium?

  Q2
• On the negative externality diagram, what lines meet to make the free market equilibrium?

  Marginal Private Benefit = Marginal Private Cost
• What is meant by social optimum?

  (Q1) social optimum is where we want to be as there is no market failure.
• On the negative externality diagram, what does the deadweight loss represent?

  The market failure