Externalities

Cards (25)

  • Market failure
    When allocative efficiency is not achieved, resulting in under or overallocation of resources (not socially optimal)
  • Allocative efficiency
    Achieved when D=S or when MB=MC
  • Demand
    Marginal benefit
  • Marginal benefit
    The additional benefit of consuming one more unit of the good
  • The more you consume of a good, the less happiness each additional object brings
  • Supply
    Marginal cost
  • Marginal cost
    The additional costs of producers pay to produce one more unit of the good
  • Marginal private cost (MPC)
    Cost to producers of producing one more unit of good
  • Marginal social cost (MSC)

    Cost to society of producing one more unit of good
  • Marginal external cost (MEC)
    The additional cost imposed on third parties by the consumption of an extra unit of a good or service
  • Marginal external benefit (MEB)
    The additional benefit imposed on third parties by the consumption of an extra unit of a good or service
  • Marginal private benefit (MPB)

    Benefits to consumers from consuming one more unit of a good
  • Marginal social benefit (MSB)
    Benefits to society from consuming one more unit of a good
  • When MPC = MSC and MPB=MSB, socially optimal equilibrium is achieved
  • If there is a different between social and private, not good
  • Externalities
    Occur when the production or consumption of a good/service cause external costs and/or external benefit
  • Externalities
    • They are the side effects of economic activity or unintended consequences of economic activity
    • The side effects impact a third party
  • Externalities
    Cause market failure if the price mechanism (i.e. Price) does not take into account the social costs and benefits of production and consumption
  • Market failure
    When the external benefits/cost are not recognised, leading to miss allocation
  • Negative externalities
    Occurs when production and/or consumption creates an external cost (to society)
  • Negative externalities
    • Causes overconsumption/production
    • Market quantity is greater than optimal quantity, but we should be producing less because it is harmful to society
    • Market price is less than optimal price
  • Negative externalities result in deadweight loss
  • Positive externalities
    External benefits of consumption or production for third parties
  • Positive externalities

    • Benefits are not recognised, hence there is too little of the good being produced or consumed, therefore there is DWL
    • Causes under consumption or production
  • Positive externalities result in deadweight loss