Private costs and benefits externalities and social costs and benefits

What is an externality?

Where the producer or consumer give rise to side effects on others not directly involved in action

Define the term negative externality

Where the side effects of an action have a negative impact that imposes costs on third parties

Define the term positive externality

Where the side effects of an action have a positive impact that provides benefits to third parties

What are Private Costs (PC) and Marginal Private Costs (MPC)?

PC - The costs that are incurred by a consumer or by the firm that produces a good or service

MPC - The change in the producer's total cost brought about by the production of an additional unit of a good or service

What are Social Costs (SC)? And give the calculation

The total costs of a particular action

SC = PC + EC

What are Marginal Social Costs (MSC) give the equation?

The total cost impacted to society due to the production of an extra item

MSC = MPC + MEC

What are External Costs (EC)?

The costs incurred and paid for a by a third party not involved in the action

What are Marginal External Costs (MEC)?

The additional cost imposed on third parties by producing an extra unit of a good or service

MEC = MSC - MPC

What are Social Benefits (SB)?

The total benefits of a particular action

SB = PB + EB

What are Private Benefits (PB)?

The benefits that are received by the consumer or to the firms that produces the good or service

Examples: Revenue, profits, charity

What are Marginal Private Benefits (MPB)?

The change in benefits for the consumer or producer due to the production of an additional good or service

What are External Benefits (EB)?

The benefits that are received by a third party not involved in the action

Examples: Improved standard of living for workers that get jobs, quality of air, improved security

What are Marginal External Benefits (MEB)?

The benefit from consuming one more unit of a good or service that falls on people other than the consumer

MEB = MSB - MPB

What is a negative externality?

Consumption: Externalities that are created by consumers as a a consequence of their use of products that result in harm to third parties

Production: Spillover effects that occur as a result of production e.g. environment pollution

What is a negative consumption externality?

Externalities that are created by consumers as a a consequence of their use of products that result in harm to third parties e.g. passive smoking

What is a positive production externality?

Benefits to third parties and are created by producers of goods and services e.g. new vaccines made from medical research

What is a positive consumption externality?

Positive spill over effects of consumption of a good or service on others e.g. provision of education results in students getting better work opportunities

Define the term Deadweight Welfare Loss

The loss in welfare arising from an inefficient allocation of resources

What is asymmetric information?

Where one party has more or better information than another in a business transaction

Example: When buying used cars, buyers care about the colour instead of whether its been in an accident or not

What is adverse selection?

When sellers have information that buyers don’t have on a product or product quality

Example: People buying used cars reduces the market for good quality vehicles

What is moral hazard?

The temptation to take risks when some other party is covering these risks

Example: Someone who takes out a loan takes a risk and starts a business