Externalities: A Microeconomics Presentation

EXTERNALITIES

An Microeconomic Presentation

Temi x Daniel

04/03/2024

AS Economics Topic 1.3.2

1. Externalities: Defined

What is an Externality ?

An externality, in simple terms is basically an external consequence, positive or negative that effects third parties, outside the price mechanism. Externalies pose a very large importance as they can lead to market faliure.

Keywords:

Positive Externality, Negative Externality

'If you're in a system where you must make profit in order to survive. You are compelled to ignore negative externalities, effects on others'

- Noam Chomsky

2. Negative v Positive

Positive

Benefits that affect third parties outside the price mechanism

• The government financing NHS, Universities, Eco-Friendly things as they benefit the rest of the economy
• Positive Consumer Externality

When consumers create the positive externalities

• Positive Production Externalities

When production create the positive externalities

Negative

Negative effects the third parties outside the price mechanism

• The government may apply taxes on goods such as cigarettes and alcohol due to them being harmful, this disencourges usage
• Negative Consumption Externalities

When the consumer creates the negative externalities

• Negative Production Externalities

When the producers create the negative externalities

The governtment dont only consider the producers and co sumers, the take into accout the whole society

Social Benefits = Private Benefits + External Benefits (Positive)

Social Cost = Private Cost + External Cost (Negative)

3. Social Cost and Benefits

Key Equations to remember

Positive Externalities Diagrams

4. Diagrams

Did you know that around 35% or students do not use a diagram in thier economics A-level Paper

35%

Use diagrams in your analysis

5. Diagrams

Negative Externality Diagram

• As shown in the diagram, Supply is equal to the MPC (PMC = SMC)
• The area that is shaded in orange is classed as the Negative externality
• To be socially efficient, fewer factors of production should be allocated to producing this good/service

Thank you!

Externalities