Externalities A spillover that affects a third party

Externalities • A spillover that affects a third party from the actions of an individual or group. • Negative externalities are a cost. • Positive externalities are a benefit. • Individuals / groups can avoid responsibility for these actions and operate at MB = MC • Marginal Benefit = Marginal Cost is the equilibrium point for the market • When a firm / individual is made accountable for their behaviour the full social cost or benefit can be considered.

Market equilibrium

Externalities caused by consumers Positive externalities Negative externalities • Consumers can be individuals • Cost spill over imposed on or operating as a market to third parties. demand (marginal benefit • Negative externalities = curve) Costs the consumers can • Positive externalities = the avoid responsibility for but benefit gained by third party as consumption will affect a result of consumption. others. • Benefits that can not be compensated for through a • Example – holiday weekend charge. traffic, air pollution from • Examples – road users taking a domestic fires, car smog in defensive driving course, the city, drunk people and increased property values reckless drivers. resulting from tidying up rundown section.

Externalities caused by Production Positive externalities • Benefits that spill over to third parties. • No way to charge for them but production benefits them. • E. g. apprenticeship training by individual firms which ensures a supply of skilled workers for the whole industry, forestry roads provide access for hunters. Negative externalities • Costs that spill over onto a third party as a result of production. • Wellbeing of third party is reduced as producers avoid costs but a direct consequence results to others. • E. g. Noise pollution from airport activity, loss of sunlight and views high rise buildings, factory waste.

Marginal Social Cost and MS Benefit Positive externalities Negative externalities