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  • 1.1.6 Externalities 2021

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    This document discusses externalities, which occur when the actions of consumers or producers create spill-over effects on third parties. It provides examples of negative externalities from cigarette consumption and beef production, as well as positive externalities from vaccinations and job training. Private costs consider only costs to individuals and firms, while social costs also include external costs imposed on third parties. The production of meat and air pollution from factories are given as examples of economic activities with external costs. The document also discusses how education and healthcare have external benefits. Government policies aim to address market failures from externalities and promote activities with positive externalities or reduce those with negative externalities.

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    This document discusses externalities, which occur when the actions of consumers or producers create spill-over effects on third parties. It provides examples of negative externalities from cigarette consumption and beef production, as well as positive externalities from vaccinations and job training. Private costs consider only costs to individuals and firms, while social costs also include external costs imposed on third parties. The production of meat and air pollution from factories are given as examples of economic activities with external costs. The document also discusses how education and healthcare have external benefits. Government policies aim to address market failures from externalities and promote activities with positive externalities or reduce those with negative externalities.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
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    3 views12 pages

    1.1.6 Externalities 2021

    Uploaded by

    ychung
    This document discusses externalities, which occur when the actions of consumers or producers create spill-over effects on third parties. It provides examples of negative externalities from cigarette consumption and beef production, as well as positive externalities from vaccinations and job training. Private costs consider only costs to individuals and firms, while social costs also include external costs imposed on third parties. The production of meat and air pollution from factories are given as examples of economic activities with external costs. The document also discusses how education and healthcare have external benefits. Government policies aim to address market failures from externalities and promote activities with positive externalities or reduce those with negative externalities.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
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    1.1.6 Externalities

    Sha Tin College - Business


    Education
    Learning Objectives

    Sha Tin College - Business


    Education
    Externalities

    Externalities occurs when the actions of consumers or producers give rise to negative
    or positive spill-over effects on third parties (neither consumer nor producer of the
    activity).

    Consider possible externalities from

    1. Cigarette consumption – Negative externalities of consumption (demerit goods)

    2. Taking vaccinations – Positive externalities of consumption (merit goods)

    3. Producing beef – Negative externalities of production

    4. On the job training - Positive externalities of production

    Sha Tin College - Business


    Education
    Private and social costs
    Private costs are the costs of an economic activity to individuals and firms. For example,
    the private costs towards the driver of a car includes the cost of the car, insurance,
    license, petrol, and maintenance etc. The private cost towards the producer e.g., Toyota,
    include the costs of production.

    External costs refer to negative spillover effects of an economic activity incurred by third
    parties for which no compensation is paid. For example, the driver of a car does not pay
    for the external cost of congestion and air pollution when driving a car. External costs is
    an example of market failure as the private costs do not represent the true costs to
    society.

    Social costs = private costs + external costs


    Sha Tin College - Business
    Education
    External costs of production
    Examples of economic activities with external costs of production include:

    • Air pollution caused by factories

    • Noise/Visual pollution from a construction site

    • Carbon emissions from meat production

    Sha Tin College - Business


    Education
    Case study
    Watch the video and answer the questions:

    Why Meat is the Best Worst Thing in the World

    1. Explain why meat production is claimed to be an inefficient allocation of resources.

    2. Identify external costs (identify the third parties) which may arise from the
    production of meat.

    3. Identify the type of meat which imposes the greatest external costs.

    Sha Tin College - Business


    Education
    External benefits of consumption (merit good)
    Examples of economic activities with external benefits of consumption include:

    • Education and training

    • Health care services

    • Dental care
    • Museums

    • Family planning clinics

    Sha Tin College - Business


    Education
    Private and social benefits
    Private benefits are the benefits of an economic activity experienced by the consumer
    or producer. For example. A car owner gains the benefit of saving time from commuting
    in their car as opposed to a train.

    External benefits are the positive side effects of an economic activity experienced by
    third parties for which no money is paid by the beneficiary. For example, if you get
    vaccinated for a transmittable disease, your family and community benefit from the
    reduced risk of transmission. External benefits is an example of market failure as the
    private benefits do not represent the true benefits to society.

    Social benefit = private benefit + external benefit

    Sha Tin College - Business


    Education
    Case study

    Why Masks Work BETTER Than You'd Think

    Sha Tin College - Business


    Education
    Causes and consequences of market failure
    A free market economic system fails to allocate resources efficiently where there are
    too activities that lead to external costs and too little activities that lead to external
    benefits.

    Free Market Mixed Economy Controlled


    Economy

    Consumer Consumer Governmen


    s& s, t
    producers producers,
    &
    governme
    nt

    Sha Tin College - Business


    Education
    Government policies to deal with externalities
    Prepare a Google Slides presentation which includes the following:

    1. Outline a real-world economic activity that imposes externalities to third parties.


    Ensure you use with real world examples such as statistics and evidence of the
    externalities.

    2. Research and explain a real-world policy that a government has adopted to address
    the issue.

    3. Illustrate the effect of the policy on a demand and supply diagram.

    4. Evaluate two advantages and two disadvantages of the policy.

    Sha Tin College - Business


    Education
    Learning Objectives

    Sha Tin College - Business


    Education

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