Externalities

• What are externalities?

  The costs and benefits to those who are not directly part of a transaction between producers and consumers
• How are externalities a form of market failure?

  Because they are not taken into account by the price mechanism, and therefore market forces will not result in an efficient allocation of resources
• What is the positive externality?

  External benefits
• What is the negative externality?

  External costs
• What are private costs?

  Costs paid directly by the producer and consumer in a transaction
• What is an example of a private cost to a producer?

  The cost of employing workers
• What is an example of a private cost to a consumer?

  The price paid for the product or service
• What are external costs?

  Spillover costs to third parties from the production or consumption of a product or service
• What is an example of an external cost of production?

  Air pollution from the smoke released from factories, damaging the environment
• What is an example of an external cost of consumption?

  Passive smoking from being around a smoker, which could lead to cancer
• What are social costs?

  The sum of private costs and external costs
• What are private benefits?

  Benefits that are recieved directly by the producer and consumer in a transaction
• What is an example of a private benefit to a producer?

  The revenue received from the sale of the product or service
• What is an example of a private benefit to a consumer?

  The utility gained from the consumption of the product or service
• What are external benefits?

  Spillover benefits to third parties from the production or consumption of a product or service
• What is an example of an external benefit of production?

  A firm that trains workers in specific skills, meaning other companies that do not do this will benefit by hiring employees from the firm
• What is an example of an external benefit of consumption?

  People who decide to get vaccinations, preventing the spread of disease to others
• What are social benefits?

  The sum of private benefits and external benefits