MYTUTOR SUBJECT ANSWERS

305 views

What are externalities?

Definition: An externality is an unintended side effect that result from production or consumption of a good, affecting the third parties.

When the market experiences externalities, it fails to reach social optimum levels where Marginal Social Benefit is equal to Marginal Social Cost.

MSB = MSC

MSB is the extra benefit to society following the consumption or production of one extra unit of a good. MSC is the extra cost to society following the consumption or production of one extra unit of a good.

Externalities can be positive or negative and relate to production or consumption. A negative externality has a negative effect on society and produces a welfare loss. A positive externality is one which has an unintended positive effect on society and produces a potential welfare gain.

Examples of externalities:

Negative externality of consumption - Where Marginal Private Cost (MPC) is above the Marginal Social Cost (MSC). There is a welfare loss between MSC and MPC.

An example of this is cigarettes.

Negative externality of production - Where Marginal Private Cost (MPC) is above the Marginal Social Cost (MSC). There is a welfare loss between MSC and MPC.

An example of this is education.

Positive externality of production - Where Marginal Social Benefit (MSB) exceeds the Marginal Private Benefit (MPB). There is a potential welfare gain between MSB and MPB.

An example of this is the use of wind farms to generate electricity.

Negative externalities are a result of overconsumption or overproduction, while positive externalities are a result of underconsumption or underproduction. Governments may intervene to correct both of these.

Elizabeth B. IB Economics tutor, IB English Literature tutor, GCSE En...

6 months ago

Answered by Elizabeth, an IB Economics tutor with MyTutor


Still stuck? Get one-to-one help from a personally interviewed subject specialist

14 SUBJECT SPECIALISTS

£22 /hr

Gabriela S.

Degree: Economics (Bachelors) - Durham University

Subjects offered:Economics, Maths+ 1 more

Economics
Maths
History

“About Me I’m an economics student at Durham University. I love learning new things, teaching them to other people and trying to make everything as interesting and understandable as possible! I really enjoy everything related to econom...”

£24 /hr

Nicolo G.

Degree: BSc Government and Economics (Bachelors) - LSE University

Subjects offered:Economics, Maths+ 2 more

Economics
Maths
History
Biology

“I am currently a student of economics and government at the London School of Economics. I developed a passion for economics during my IB diploma studies and I hope I will be able to instill that passion in you as well. I am very patien...”

£20 /hr

Sanveer R.

Degree: Management (Bachelors) - LSE University

Subjects offered:Economics, Maths

Economics
Maths

“Who Am I: My name is Sanveer, but you can call me Sunny. I have Indian origins, but I grew up in Switzerland, where I lived for 14 years before moving to the UK. My passions include basketball and music. I am a student studying Manage...”

About the author

Elizabeth B.

Currently unavailable: for new students

Degree: Policy, Politics & Economics (Bachelors) - Birmingham University

Subjects offered:Economics, Music+ 3 more

Economics
Music
Maths
English Literature

“Hi! I'm a Policy, Politics and Economics student at the University of Birmingham. Prior to that I studied IB which I think has definitely helped with my personal development and made me into a bit of an "all-rounder". Seeing as my cou...”

MyTutor guarantee

You may also like...

Posts by Elizabeth

What are externalities?

What is sonata form?

Other IB Economics questions

What is the key difference between the Keynsian and the Neo-Classical schools of thought? Explain using a diagram.

1. What is a floating exchange rate system and what factors influence the level of a country’s exchange rate?

If a country wishes to depreciate their own currency, how could they do so in terms of monetary policy? List three possible effects depreciating their currency will have on the economy.

How can I achieve a top grade?

View IB Economics tutors

We use cookies to improve your site experience. By continuing to use this website, we'll assume that you're OK with this. Dismiss

mtw:mercury1:status:ok