Externalities
- Created by: callum.jones
- Created on: 29-04-15 19:24
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- Externalities
- Private and Social costs and benefits
- Private cost - cost of an activity to an individual economic unit
- Social cost - the cost of an activity to the rest of the society
- Private benefit - benefit of an activity to an individual economic unit
- Social benefit - benefit of an activity to the rest of the society
- Positive and Negative externalities
- Negative externality - If a social cost is greater than a private cost
- Positive externality - If a social benefit is greater than the private benefit
- Definition: The difference between private costs and benefits and social costs and benefits
- Marginal cost and benefits
- The difference between social costs and social benefits changes as the level of output changes
- The marginal cost of production is the extra cost of producing an extra unit of output
- The marginal benefit is the benefit received from consuming an extra unit of output
- The margin is a possible point of change
- Welfare losses
- Production externalities
- Occurs when the social cost of production is greater than the private cost of production
- the loss is the difference between the marginal socail cost and the marginal private benefit
- Consumption externalities
- occurs where social benefit is greater than the private benefit
- Production externalities
- Government policy
- Regulation - e.g. lay down maximum pollution levels
- Extended property rights - is a way of internalising the externality - eliminating the externality.
- taxes - sets tax rates those externalities equal to the externality which increases costs to customers by shifting supply to the left
- Permits - governments offers permits to pollute which are tradeable for money
- Private and Social costs and benefits
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