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Externalities - Coggle Diagram
Externalities
Consumption
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Merit Goods: Education and healthcare, for example, produce positive externalities.
Social Benefits: The total benefits from consumption, including external benefits added to private benefits.
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Production
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Environmental Damage: Pollution, for example, produces negative externalities.
Social Costs: The total costs of production, including external costs added to private costs.
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Policies
Taxation: Imposing a tax, such as a carbon tax, to reduce external costs.
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Cap-and-Trade Market: Creating a market where firms purchase permits from the least polluting firms.
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Market Failure
Definition: Allocating resources based only on private costs and benefits creates a welfare loss to society.
Socially Efficient Quantity: The quantity where marginal social benefit equals marginal social cost.
Issues
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Excessive Consumption: Over-subsidization of goods, such as healthcare.
Conclusion
Intervention is required to achieve a socially efficient output, although this can create problems and unintended consequences.
The market works efficiently when there are no external costs or benefits, but where externalities arise, the market may fail with goods being over or under supplied.
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