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Externality: where the actions of producers or consumers give rise to side…
Externality: where the actions of producers or consumers give rise to side effects on third parties who are not involved in the action(spillover effects)
Negative Externality: where the side effects have a negative impact and impose costs to third parties
Positive Externality: where the side effects have a positive impact and provide benefits to third parties
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- Example: Environmental pollution of firms dumping chemical waste into the river
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- Example 2: Consumption of coal by coal-fired power stations, air craft and heavy industry
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- Example: Medical research (new drug or vaccine)
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- Example: Provision of merit goods by government such as tertiary education
Effect: Student who receives it will have better employment opportunity, hence benefiting their family and future economic prospects
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- Spillover as a result of production activity
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- Consumption by a consumer harms others who are not involved in consumption
- Benefit to third party created by production activity
- Spillover benefits created by consumption
- Negative externality: a situation where there is a divergence between private costs and social costs
- Private costs: Cost incurred by an individual who produces a good or service
- Social costs: total cost of a particular action
- social cost = private costs + external costs
- External costs: those costs incurred and paid for by third party not involve in the action
- Social Benefit: the total benefits arising from a particular action
- Private benefits: Benefits that accrue to individuals who produce or consume a particular good
- External benefits: benefits that are received by third parties not involved in the action
- Social benefit: private benefits + external benefits
- Only private cost of producing and distributing the product is considered when deciding price
- Cost to the society(external costs) will not be considered
- Price will be lower than if all social costs were recognised
- Demand and production will be higher
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- Only the private benefits are considered
- Benefits to the society(external benefit) will not be considered
- Demand registered will be lower, production will be lower
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