Externalities & Market Failure (Quizlet Revision Activity)

Here are some key terms focusing on externalities to help with your revision on the economics of externalities and market failure.

Here is a summary of the key terms in this revision Quizlet activity

• Carbon trading: Market which buys and settles permits to emit carbon from one/more industries
• Deadweight loss: Loss in producer and consumer surplus due to an inefficient level of production perhaps resulting from market failure or government failure.
• External benefit: A benefit to a 3rd party agent arising from production and/or consumption
• External cost: Those costs faced by a third party for which no appropriate compensation is forthcoming
• Marginal social benefit: Marginal private benefit + marginal external benefit
• Marginal social cost: Marginal private cost + marginal external cost
• Mixed externalities: When production and/or consumption leads to both external costs and external benefits
• Negative consumption externality (Example): Covid masks dropped by people in a town centre
• Negative production externality (Example): Pollution from fertilisers used in farming
• Net social benefits: When the external benefits from production / consumption outweigh the external costs
• Net social costs: When it costs society more to produce/consume than society values these units
• Nudges: Incentives to make it easier to choose less costly environmental choices.
• Pigouvian Tax: Charge on goods & services with external costs - "making the polluter pay"
• Positive consumption externality (Example): People getting their covid vaccination
• Positive production externality (Example): Breweries provide water to local farmers via a irrigation network
• Private optimum consumption: Where marginal private benefit = marginal private cost
• Social efficiency: An output where Social Marginal Cost (SMC) = Social Marginal Benefit (SMB).
• Social optimum consumption: Where marginal social benefit = marginal social cost
• Spillover effects: External effects of economic activity, which have an impact on outsiders who are not producing or consuming a product
• Third party: Agent not directly involved in act of production or consumption
  

Welfare Loss from Negative Production Externalities

​In this revision video we cover how to show the social welfare loss when there are negative externalities from production leading to market failure.

Mixed Externalities and Market Failure

This short revision video looks at mixed externalities. In most markets, there are both positive and negative externalities to consider, so the net social benefit or net social cost becomes an important aspect of the analysis and evaluation. Mixed externalities occur when production and/or consumption leads to both external costs and external benefits. The socially optimum level of output will depend on the extent and value of these negative and positive externalities.