What externalities are and how do they effect a economy

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  • WHAT EXTERNALITIES ARE AND HOW THEY EFFECT AN ECONOMY
    • SOCIAL COSTS AND BENEFITS
      • SOCIAL COSTS= SUM OF PRIVATE COSTS + EXTERNAL COSTS
      • PRIVATE COST- COST OF BUYING A RAIL TICKET
      • EXTERNAL COST- CO2 EMISSIONS
      • SOCIAL BENEFITS=  SUM OF PRIVATE BENEFITS THAT THE INDIVIDUAL GETS THROUGH TRAVELLING BY RAIL + THE EXTERNAL BENEFITS
      • PRESENCE OF EXTERNAL BENEFITS= MERIT GOOD
      • NO PRIVATE BENEFITS= PUBLIC GOOD
    • EXAMPLES OF EXTERNALITIES; SOCIAL, ECONOMIC AND ENVIROMENTAL
      • ECONOMIC
        • EFFECTS BUSINESSES
        • EXTERNAL COSTS
          • POSSIBILITY OF UNWISE INVESTMENTS IN PRESTIGE PROJECTS- HS2?
        • EXTERNAL BENEFITS
          • INCREASED ECONOMIC ACTIVITY NEAR RAIL STATIONS
      • SOCIAL
        • RELATES TO NEIGHBOURS
        • EXTERNAL BENEFITS
          • GREATER ABILITY TO VISIT FRIENDS IN OTHER CITIES
        • EXTERNAL COSTS
          • MORE LONG DISTANCE COMMUTING CREATING 'COMMUTER TOWNS' WITH FEW SOCIAL ACTIVITIES
      • ENVIROMENTAL
        • IMPACT IS FIRST FELT BY THE NATURAL ENVIROMENT
        • EXTERNAL COSTS
          • DECLINE IN PROPERTY VALUES AROUND MAIN RAIL STATIONS
        • EXTERNAL BENEFITS
          • REDUCED CO2 EMISSIONS IF TRAVELLERS SUBSTITUTE OUT OF CARS AND INTO TRAINS
    • DIFFICULTIES MEASURING EXTERNALITIES
      • PRIVATE COSTS AND BENEFITS ARE EASY TO MEASURE
        • HIRED ACCOUNTANTS TO WORK OUT PRIVATE COSTS
      • CONSUMERS WHO SHOP REGULARLY    DEVELOP A CLEAR IDEA HOW MUCH SOMETHING IS WORTH TO THEM I.E. PRIVATE BENEFIT
      • EXTERNALITIES ARE SPREAD OUT OVER A MUCH WIDER POPULATION- HARDER TO MEASURE
      • E.G. A PROJECT LIKE HS2 WILL GENERATE EXTERNAL BENEFITS NEAR ITS FEW STATIONS AS COMPANIES ARE ATTRACTED    BY FASTER TRAVEL TO LONDON
        • EXTERNAL COSTS-INCREASED NOISE POLLUTION AND VISUAL POLLUTION
    • IMPACT OF EXTERNALITIES IN SHORT VS LONG RUN
      • HARD TO MEASURE EXTERNALITIES DUE TO THE TIME PERIOD IT TAKES TO MAKE THEIR IMPACT
      • WITH RAILWAYS. MANY OF THE EXTERNAL COSTS WOULD BE 'FRONT LOADED'
      • BUILDING WORKS WILL CAUSE DISTRUPTION
        • HOWEVER, EXTERNAL BENEFITS MAY LAST FOR DECADES TO COME
          • E.G. STILL ENJOYING BENEFITS FROM THE MID-19TH CENTURY CONSTRUCTION OF THE UK RAIL NETWORK

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