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Externalities

Learn about externalities, private, external, and social costs, de-merit goods, and market failures. Understand how negative externalities impact society and why market mechanisms sometimes fail to consider full social costs.

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Externalities

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  1. Externalities Negative

  2. Define key words • Market failure • Private cost • External cost • social costs • De merit goods • Externalities p.60 – AS text

  3. Objectives • Define externalities • Explain negative externalities • Utilise key terms: private, external and social costs. De merit goods • Illustrate a negative externality p.60 – AS text

  4. p.60 – AS text

  5. Externalities Defined Third party (or spill-over) effects arising from the production and/or consumption of goods and service. p.60 – AS text

  6. Social costs not taken to account Externalities can cause market failure if the price mechanism does not take into account the full social costs of production and consumption. Does a road user pay for the pollution he permits? Do binge drinkers pay for costs to policing city centres? http://www.dailymail.co.uk/health/article-196793/Heavy-cost-binge-drinking.html http://www.bbc.co.uk/news/10213337 http://www.bbc.co.uk/news/uk-england-nottinghamshire-16698793 p.60 – AS text

  7. Market Failure • This is when the free market does not allocate resources efficiently. • De-Merit Goods • Goods which society over-produces • Goods and services provided by the market which are not in our best interests! • Tobacco and alcohol • Drugs • Gambling p.60 – AS text

  8. Private Costs: The costs incurred by those who buy and those who produce the goods and services. p.60 – AS text

  9. External Costs and Social Costs External cost • The cost of an economic decision to a third party Social Cost • The total cost of an action • (Private + external costs) • http://www.bbc.co.uk/news/uk-politics-15476670 • Heathrow airport expansion plans result in further protests • What are the private, external and social costs of the expansion? p.60 – AS text

  10. Negative externalities • The social cost of an activity is greater than the private cost. • Soial cost is the true cost. • Explain how the below may have negative externalities; • Chewing gum • Illegal dumping • Can you think of your own? p.60 – AS text

  11. Define these key words • Private cost • External cost • social costs • De merit goods • Externalities p.60 – AS text

  12. Objectives • Define externalities • Explain negative externalities • Utilise key terms: private, external and social costs. De merit goods • Illustrate a negative externality (extension only..) p.60 – AS text

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