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Externalities: A Microeconomics Presentation

Temi Onabajo (10HKF)

Created on March 4, 2024

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Transcript

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.

'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

Keywords:

Positive Externality, Negative Externality

2. Negative v Positive

Negative

Positive

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

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

3. Social Cost and Benefits

Key Equations to remember

Social Cost = Private Cost + External Cost (Negative)

Social Benefits = Private Benefits + External Benefits (Positive)

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

4. Diagrams

Positive Externalities 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