Externalities

Positive Externalities

Occurs when an individual or firm's actions confer benefits on others not directly involved in the transaction.

Underproduction

A market failure where goods or services are consumed less than the socially optimal level due to unaccounted external benefits

Marginal Social Benefit (MSB)

The total benefit to society, which exceeds the Marginal Private Benefit (MPB) because it includes external benefits.

Education as a positive externality

An educated individual contributes to society through productivity, civic activities, and innovation.

Vaccinations as a positive externality

Vaccination protects the individual and benefits the broader community by reducing disease spread.

Negative Externalities

Occurs when the production or consumption of a good imposes costs on third parties not involved in the transaction.

Pollution as a negative externality

The emission of pollutants by factories affects health and well-being of nearby residents.

Marginal Private Cost (MPC)

The cost borne by the producer for producing an additional unit.

Deadweight Loss

The loss of total societal welfare due to underconsumption in the case of positive externalities or overproduction in negative externalities.

Pigovian Taxes

Taxes imposed to equal external costs, aligning private costs with social costs.

Regulations

Policies set by the government to limit activities generating negative externalities, such as emission standards.

Tradable Permits

Allow firms to buy and sell rights to produce a certain amount of externalities, creating a market for pollution rights.

rent-seeking

The practice of gaining economic advantage through manipulation or exploitation of the political environment, rather than through trade and production