Positive externalities occur when third parties receive benefits due to the production or consumption of a good or service.
What is a negative externality?
Costs imposed on third parties
Pollution from factories is an example of a negative externality.
True
An externality occurs when the production or consumption of a good or service affects a third party who is not directly involved in the transaction
What is a positive externality?
Benefits to third parties
Vaccinations leading to herd immunity are an example of a positive externality.
True
Negative externalities occur when third parties bear costs due to the production or consumption of a good or service.
What are common government intervention measures to correct negative externalities?
Taxes, regulations, subsidies
In a negative externality, the Marginal Social Cost (MSC) is higher than the Marginal Cost (MC), resulting in overproduction and a deadweight loss to society.
What is the effect of positive externalities on the market?
Underproduction
In a positive externality, the Marginal Social Benefit (MSB) exceeds the Marginal Private Benefit (MB).
True
What are government interventions to encourage the production of goods with positive externalities?
Subsidies, public provision
What does MSB stand for in the context of externalities?
Marginal Social Benefit
Positive externalities occur when the production or consumption of a good generates benefits for third parties
How does a positive externality affect the market equilibrium?
Underproduction
What is the purpose of taxes in addressing negative externalities?
Align private and social costs
Governments can use regulations to limit activities generating negative externalities
The choice of policy measure to correct externalities depends on the specific context and nature of the externality.
True
What is an example of a positive externality?
Herd immunity from vaccinations
In the presence of a negative externality, what is the relationship between MSC and MC?
MSC > MC
What is the role of subsidies in addressing positive externalities?
Encourage production
Air pollution from factories is an example of a negative externality.
True
What causes a divergence between private and social costs in negative externalities?
Costs imposed on third parties
In the presence of a negative externality, the Marginal Social Cost (MSC) is higher than the Marginal Cost (MC), leading to a deadweight loss to society.
A deadweight loss occurs in a market with a negative externality because the market produces more than the socially optimal quantity.
True
Taxes and regulations can align private and social costs in the presence of negative externalities.
True
Positive externalities lead to a divergence between private and social benefits, resulting in underproduction in the market.
The market equilibrium quantity (Q*) is lower than the socially optimal quantity (Qopt) in the presence of a positive externality.
True
Subsidies are a government intervention to encourage the production of goods with positive externalities.
True
Match the policy measure with its impact on quantity:
Taxes ↔️ Reduces quantity to socially optimal level
Subsidies ↔️ Increases quantity to socially optimal level
Regulations ↔️ Directly limits to socially optimal level
An externality occurs when the production or consumption of a good affects a third party
Negative externalities lead to a divergence between private and social costs.
True
Positive externalities create a divergence between private and social benefit
Match the government intervention measure with its primary impact:
Taxes ↔️ Aligns private and social costs
Subsidies ↔️ Encourages production
Regulations ↔️ Addresses source of externality
What is an example of a societal cost associated with herd immunity from vaccinations?