4.1.8.4 Positive & negative externalities

studied byStudied by 3 people
0.0(0)
learn
LearnA personalized and smart learning plan
exam
Practice TestTake a test on your terms and definitions
spaced repetition
Spaced RepetitionScientifically backed study method
heart puzzle
Matching GameHow quick can you match all your cards?
flashcards
FlashcardsStudy terms and definitions

1 / 19

flashcard set

Earn XP

Description and Tags

20 Terms

1

What are externalities?

  • third party effects arising from production and consumption of goods/services for which no appropriate compensation is paid.

New cards
2

Where do externalities occur?

  • outside of the market ie. they affect people not directly involved in the production and/or consumption of a good or service.

New cards
3

What’s an example of a negative externality of consumption?

  • A person smoking a cigarette (or eating an egg sandwich) at a bus stop has made a deliberate economic decision to consume a product.

  • The person standing next to her has not made that decision but is ‘consuming’ the bad smell resulting from the decision made by the other person.

New cards
4

What’s an example of a positive externality of consumption?

  • A family halfway down my street love their fireworks!

  • They spend a huge amount on sophisticated fireworks on Guy Fawkes night and put on a great display.

  • Assuming I enjoy fireworks, their economic decision to consume fireworks counts as a positive externality of consumption for me

New cards
5

What’s an example of a negative externality of production?

  • Making furniture by cutting down rainforests in the Amazon displaces the indigenous people of the Amazon rainforest.

  • It also leads to higher global warming as there are less trees to absorb carbon dioxide

New cards
6

What’s a positive externality of production?

  • A farmer grows apple trees. An external benefit is that he provides nectar for a nearby beekeeper who gains increased honey because of the farmers orchard

New cards
7

What are socials costs?

  • Social cost = Private cost + External cost

New cards
8

What are private costs?

  • costs the firm pays to purchase capital equipment, hire labour, and buy materials or other inputs, for a producer of a good/service

New cards
9

What are external costs?

  • not reflected on firms’ income statements.

  • costs to society

New cards
10

If social benefit > social cost, then…

product/project is good for society at large.

New cards
11

if private benefit ≯ private cost then…

it will not be worthwhile for an entrepreneur/firm to invest.

New cards
12

What do negative production externalities lead to?

• under-pricing

• over-consumption

• over-production of goods (Excess Supply)

New cards
13

What do Positive production externalities lead to?

  • over-pricing

  • under-consumption

  • under-production (Excess Demand)

New cards
14

What are Negative production externalities & Positive production externalities examples of?

  • market failure: the market mechanism producing the goods in the wrong quantities.

New cards
15

What are negative externalities in production?

  • costs resulting from the production process that aren’t paid for by the producer.

New cards
16

Negative Production Externalities Diagram

  • Without having to pay for externalities, the supply curve is at S1. This is called the private supply curve. It leads to a private equilibrium at (Q1, P1).

  • Supply curve S2 is the social supply curve. It factors in the external costs and leads to a social equilibrium at (Q2, P2). Notice that price is higher, and quantity is less

  • vertical gap between the two supply curves represents the external costs.

<ul><li><p>Without having to pay for externalities, the supply curve is at S1. This is called the private supply curve. It leads to a private equilibrium at (Q1, P1).</p></li><li><p>Supply curve S2 is the social supply curve. It factors in the external costs and leads to a social equilibrium at (Q2, P2). Notice that price is higher, and quantity is less</p></li><li><p>vertical gap between the two supply curves represents the external costs.</p></li></ul>
New cards
17

Positive Production Externalities Diagram

  • Without gaining the benefit of the externalities, the supply curve is at S1. This is called the private supply curve. It leads to a private equilibrium at (Q1, P1).

  • A social equilibrium at (Q2, P2) including external benefits, could be achieved, for instance, by government subsidies to incentivise greater production

  • This time the vertical gap between the two supply curves represents the external benefit. Positive Production Externalities P2 Q2

<ul><li><p>Without gaining the benefit of the externalities, the supply curve is at S1. This is called the private supply curve. It leads to a private equilibrium at (Q1, P1).</p></li><li><p>A social equilibrium at (Q2, P2) including external benefits, could be achieved, for instance, by government subsidies to incentivise greater production</p></li><li><p>This time the vertical gap between the two supply curves represents the external benefit. Positive Production Externalities P2 Q2</p></li></ul>
New cards
18

Why does the market fail and what is done to correct this?

  • The market (left to its own devices) fails, because the socially irresponsible private equilibrium will be the outcome.

  • The government can intervene to ‘correct’ the market. It could, for instance, introduce a pollution tax, forcing companies to pay costs equal to the estimated* value of the negative externalities.

  • This effectively shifts the supply curve back to S2 leading the market to find the social equilibrium.

New cards
19

negative externality of consumption diagram

knowt flashcard image
New cards
20

positive externality of consumption diagram

knowt flashcard image
New cards

Explore top notes

note Note
studied byStudied by 64 people
213 days ago
4.7(3)
note Note
studied byStudied by 26 people
891 days ago
5.0(1)
note Note
studied byStudied by 25 people
514 days ago
5.0(1)
note Note
studied byStudied by 4 people
688 days ago
5.0(1)
note Note
studied byStudied by 16 people
903 days ago
5.0(1)
note Note
studied byStudied by 10 people
760 days ago
5.0(1)
note Note
studied byStudied by 67 people
701 days ago
5.0(4)
note Note
studied byStudied by 44 people
758 days ago
5.0(3)

Explore top flashcards

flashcards Flashcard (92)
studied byStudied by 11 people
841 days ago
4.0(1)
flashcards Flashcard (116)
studied byStudied by 10 people
800 days ago
5.0(1)
flashcards Flashcard (43)
studied byStudied by 15 people
3 days ago
5.0(1)
flashcards Flashcard (57)
studied byStudied by 17 people
750 days ago
5.0(2)
flashcards Flashcard (40)
studied byStudied by 2 people
177 days ago
5.0(1)
flashcards Flashcard (71)
studied byStudied by 42 people
385 days ago
5.0(4)
flashcards Flashcard (82)
studied byStudied by 41 people
88 days ago
5.0(1)
flashcards Flashcard (222)
studied byStudied by 29 people
646 days ago
5.0(1)
robot