CHAPTER 18 - EXTERNALITIES
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37 Terms
Private Cost
the cost paid by the person or business making the decision
External Cost
the cost that affects other people who are not part of the decision
Private Benefit
the benefit received by the person or business making the decision
External Benefit
the benefit received by other people who are not part of the decision
Negative Production Externality
a business produces something, but it harms others
Negative Consumption Externality
a person consumes something, but it harms others
Positive Production Externality
a business produces something that helps others
Positive Consumption Externality
a person consumes something that helps others
What are examples of negative production externality?
Factory pollution, dumping trash in the ocean
What are examples of negative consumption externality?
Cigarette smoking, littering
What are examples of positive production externality?
Bees pollinating crops, farmer planting trees
What are examples of positive consumption externality?
Vaccinations, getting an educationÂ
Negative Externality = Total External ______
Cost
Positive Externality = Total External ______
Benefit
Private Optimum = __________ Equilibrium
Market
Social Optimum = ________ Equilibrium
After the shift
Pigovian Tax
a tax placed on something that creates harm for other people to reduce harmful behavior and make the person or business causing the harm pay for the cost
What is the private optimum?
The costs and benefits to buyers and sellers
What is social optimum?
The external costs and benefits that affect everyone
What is the condition for finding the private optimum?
Private MB = Private MC
What is the condition for finding the social optimum?
Social MB = Social MC
What curve shifts with production externalities?
The supply curve
What curve shifts with consumption externalities?
The demand curve
Which direction does the supply curve shift for a negative production externality?
Left
Which directions does the supply curve shift for a positive production externality?
Right
Which direction does the demand curve shift for a negative consumption externality?
Left
Which direction does the demand curve shift for a positive consumption externality?
Right
What is the formula for total external cost?
external cost per unit x quantity produced
What is the formula for total external benefit?
external benefit per unit x quantity produced
How do you correct a negative externality?
Impose a tax
How do you correct a positive externality?
Provide a subsidy
The Pigovian tax is the external ____ per unit
cost
A subsidy is the external _____ per unit
benefit
How do you find externality per unit?
It’s the vertical distance between the private curve and social curve
In a negative externality, which way does the DWL point towards?
DWL points to the left
In a positive externality, which way does the DWL point towards?
DWL points to the right
Why does DWL happen in externalities?
The market produces the wrong quantity and doesn’t account for external costs or benefits