Negative externalities of production

What is market failure?

When the price mechanism leads to an inefficient allocation of resources and a deadweight loss of economic welfare

What are the three types of market failure?

• Overallocation of resources

• Under allocation of resources

• Missing markets

What does missing markets mean in terms of market failure?

Public goods which will not be provided in the private sector

What does under allocation of resources mean the existence of?

Positive externalities

What does over allocation of resources mean the existence of?

Negative externalities

What do externalities have an impact?

A third party

What are externalities?

The unintended side effects of consequences of an economic activity or transaction that affects third parties who are not directly involved - these c=effects can be either positive or negative

How do externalities cause market failure?

The disrupt the efficient functioning of markets and lead to a net loss of social welfare

What are private costs?

Internal costs faced by the producer or consumer directly involved in a transaction

When do external costs occur?

When the activity of one agent has a negative effect on the wellbeing of a third party so they impose costs on other agents causing social cost to be greater than private cost

When do negative externalities of production occur?

When production impose external costs on third parties outside of the market for which no appropriate compensation is paid

What are 2 examples of negative production externalities?

• Air pollution from factories

• Noise pollution from the airline industry

What is the marginal private cost?

Additional private cost to produce or consume one unit

What is the marginal external cost?

The additional cost to 3rd parties of producing one unit

What is the marginal social cost?

The additional social cost to produce or consume one unit