Understanding Externalities and Costs

These flashcards cover key concepts related to externalities, their impact on private and social costs, and examples to illustrate the differences.

What are externalities?

Costs or benefits that affect someone not directly involved in the consumption or production of a good.

What is a negative externality?

An additional cost incurred by third parties not involved in the consumption or production process, such as pollution.

Give an example of a negative externality.

Pollution from a power plant affecting the health of people living downwind.

What is the private cost?

The cost borne by the producer of a good, including all considerations for their production decisions.

What are social costs?

The total cost of producing a good, including any external costs like pollution.

What does marginal private benefit refer to?

The value received by the consumer for each additional unit of a good.

How do producers determine how much to consume or produce?

By comparing their marginal private benefit to their marginal private cost.

What is marginal social cost?

The total cost of producing a good, including marginal private cost plus any marginal external costs.

What happens when your roommate consumes loud music beyond the social equilibrium?

They create a deadweight loss, where the marginal social cost exceeds the marginal private benefit.

What is deadweight loss?

The total loss of surplus from overconsumption that occurs when external costs are not accounted for.

What is an example of a situation with no market inefficiency?

An increase in the demand for tacos leading to higher prices without externalities.

When does market reach social efficiency?

When the price reflects all costs, including externalities, leading to no overconsumption.