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An Microeconomic Presentation

Temi x Daniel


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.


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


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 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


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!