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Terms in this set (6)
Classically, we speak of an externality when an action by one
consumer or firm affects another consumer or firm.
Externalities can occur in consumption and in production (on the
buyer and the seller side of a market).
Externalities can be negative as in the cigarette example (another
person is harmed by the action) or positive (another person benefits
from the action).
More broadly (and covering things outside of classical markets) -
whenever the behaviour of someone affects someone else in some
direct way, we can think of this as an externality.
consumer or firm affects another consumer or firm.
Externalities can occur in consumption and in production (on the
buyer and the seller side of a market).
Externalities can be negative as in the cigarette example (another
person is harmed by the action) or positive (another person benefits
from the action).
More broadly (and covering things outside of classical markets) -
whenever the behaviour of someone affects someone else in some
direct way, we can think of this as an externality.
Education provides higher wages (individual benefit).
Education also makes people less likely to commit crimes. This
means that one person's higher education lowers another person's
victimisation risk. (externality)
There is also evidence that someone working alongside higher
educated people has an increased productivity, i.e., person A's
education increases person B's productivity. (externality)
Education also makes people less likely to commit crimes. This
means that one person's higher education lowers another person's
victimisation risk. (externality)
There is also evidence that someone working alongside higher
educated people has an increased productivity, i.e., person A's
education increases person B's productivity. (externality)
A negative production externality means that social cost > private
cost. A classical example is pollution caused by the production of a good.
The private cost on this case is the normal production cost for the
firm.
The social cost also includes health losses of individuals living next
to the factory, the disutility caused by lower air quality, etc.
cost. A classical example is pollution caused by the production of a good.
The private cost on this case is the normal production cost for the
firm.
The social cost also includes health losses of individuals living next
to the factory, the disutility caused by lower air quality, etc.
A positive production externality means that social cost < private
cost.
A classical example is a beehive benefiting farmers in the same area
by pollinating their plants.
Private cost is the costs of maintaining the beehive for its owner.
The social cost includes the fact that the farmers can now produce
at lower costs.
cost.
A classical example is a beehive benefiting farmers in the same area
by pollinating their plants.
Private cost is the costs of maintaining the beehive for its owner.
The social cost includes the fact that the farmers can now produce
at lower costs.
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Economic Applications - Consumer Theory
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