Externalities

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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
    • 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

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