Positive and negative externalities in cons and prod

• What is an externality in economics?

  An externality is the cost or benefit a third party receives from an economic transaction outside of the market mechanism.
• How can externalities be described in terms of market transactions?

  Externalities are the spill-over effects of the production or consumption of a good or service.
• When do externalities exist in economic terms?

  Externalities exist when there is a divergence between private and social costs and benefits.
• What types of externalities can occur?

  Externalities can be positive (external benefits) or negative (external costs).
• What are private costs in the context of production?

  Private costs are the costs that producers are concerned with, such as rent, machinery, labor, insurance, transport, and raw materials.
• How do private costs influence production decisions?

  Private costs determine how much the producer will supply.
• What does the term 'social costs' refer to?

  Social costs are calculated by adding private costs and external costs.
• How are external costs defined?

  External costs are the difference between private costs and social costs.
• How do external costs behave as output increases?

  External costs increase disproportionately with increased output.
• What do consumers focus on regarding private benefits?

  Consumers are concerned with the private benefit derived from the consumption of a good.
• How is the private benefit determined?

  The price the consumer is prepared to pay determines the private benefit.
• What are social benefits in economic terms?

  Social benefits are private benefits plus external benefits.
• How are external benefits defined?

  External benefits are the difference between private and social benefits.
• How do external benefits behave as output increases?

  External benefits increase disproportionately as output increases.
• What are external costs of production?

  External costs occur when a good is being produced or consumed, such as pollution.
• How does market equilibrium relate to externalities?

  The market equilibrium, where supply equals demand at a certain price, ignores negative externalities.
• What is the consequence of the market ignoring negative externalities?

  This leads to over-provision and under-pricing of goods.
• What happens if the market fails to account for negative externalities?

  It would reduce welfare in society if left to the free market.
• What is an example of an external benefit from production or consumption?

  An example is the decline of diseases and healthier lives of consumers through vaccination programs.
• Why are external benefits underprovided in the free market?

  Consumers and producers do not account for external benefits, leading to underprovision and underconsumption.
• What are the key differences between private costs, social costs, private benefits, and social benefits?

  • Private Costs: Costs incurred by producers (e.g., rent, labor).
  • Social Costs: Private costs plus external costs.
  • Private Benefits: Benefits consumers derive from consumption.
  • Social Benefits: Private benefits plus external benefits.

  
• What are the implications of externalities on market efficiency?

  • Negative externalities lead to over-provision and under-pricing.
  • Positive externalities lead to under-provision and under-consumption.
  • Both result in market failure and reduced welfare in society.