Externalities (Edexcel IGCSE Economics): Flashcards
Exam code: 4EC1
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Define externality.
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Cards in this collection (36)
Define externality.
An externality occurs when there is an external impact on a third party not involved in the economic transaction.
Define private cost.
A private cost is what a producer actually pays to produce a good or service.
Define external cost.
An external cost, or negative externality, is the damage not factored into the economic activity, such as air pollution from producing electricity.
Define private benefit.
A private benefit is what a consumer personally gains from consuming a good or service.
Define external benefit.
An external benefit, or positive externality, is the benefit not factored into the economic activity, such as society gaining strong legal institutions when someone studies law.
When do external costs occur?
External costs occur when the social costs of an economic transaction are greater than the private costs.
When do external benefits occur?
External benefits occur when the social benefits of an economic transaction are greater than the private benefits.
Which two sides of the market can externalities affect?
Externalities can affect the production side (producer supply) and the consumption side (consumer demand) of the market.
True or False?
Externalities can be either positive or negative.
True.
Externalities are spillover effects that can be either positive or negative for a third party.
True or False?
Social costs are equal to private costs minus external costs.
False.
Social costs are equal to private costs plus external costs.
Private benefit + external benefit = .
Private benefit + external benefit = social benefits.
Define negative externality of production.
A negative externality of production occurs whenever the production of a good or service generates external costs.
Define over-provision.
Over-provision is when the market produces too much of a good because producers consider only their private costs and not the external costs.
How can the external costs of steel production increase government spending?
The government may need to allocate additional funds for healthcare to treat pollution-related illnesses, such as respiratory diseases.
What happens to quantity and price if external costs are taken into account?
If external costs were considered, the quantity provided would decrease and the remaining units would be sold at a higher price.
How does the steel industry create external costs?
The steel industry emits greenhouse gases during production, contributing to climate change and posing health risks to vulnerable groups.
Give two external costs of mining iron ore.
External costs of mining iron ore include soil erosion, loss of habitat, decreased air quality and chemical leakage into the water table.
Name two government interventions used to correct external costs.
The government can use indirect taxation and regulation enforcement through fines to correct external costs.
Which groups should analysis of external costs consider the impact on?
Analysis should consider the impact on stakeholders, including producers, consumers, government and relevant third parties.
True or False?
An industry that creates external costs, such as steel, can also bring benefits like employment.
True.
The steel industry creates external costs but also provides employment opportunities that contribute to economic growth.
True or False?
Government intervention to reduce external costs only ever has advantages.
False.
Any intervention has advantages and disadvantages; for example, decreasing external costs may decrease output and economic growth.
External cost = social cost − .
External cost = social cost − private cost.
Examples of external costs of production include pollution, congestion and .
Examples of external costs of production include pollution, congestion and environmental damage.
Define positive externality of consumption.
A positive externality of consumption occurs whenever the consumption of a good or service generates external benefits.
Define under-consumption.
Under-consumption is when the market consumes too little of a good because consumers consider only their private benefits and not the external benefits.
How do government-provided leisure centres benefit local health services?
Healthy people require less state medical care, which reduces the burden on local health services and the state.
What happens to quantity consumed if external benefits are taken into account?
If external benefits were considered, the quantity consumed would increase and, due to higher demand, goods would be sold at a higher price.
Give two examples of goods that generate external benefits.
Goods with external benefits include education, healthcare and vaccinations.
What is the external benefit of honey production?
The external benefit of honey production is the pollination of surrounding flora and fruit orchards.
What is the external benefit of a measles vaccination?
The external benefit is that the protected individual is unable to pass measles on to their friends, keeping them safe from catching it.
How do university graduates generate external benefits?
Graduates obtain higher-skilled jobs and are more productive, leading to economic growth, reduced inequality and a higher standard of living.
Name two government interventions used to encourage external benefits.
The government can subsidise provision, build new centres or advertise to raise awareness of the benefits.
True or False?
Positive externalities of consumption cause the market to over-consume goods.
False.
They cause under-consumption, because consumers consider only their private benefits.
True or False?
Any government intervention to encourage external benefits carries both advantages and disadvantages.
True.
For example, subsidising leisure centre memberships may reduce the funding available for libraries.
External benefit = social benefit − .
External benefit = social benefit − private benefit.
Subsidising leisure centre memberships may reduce the funding available for .
Subsidising leisure centre memberships may reduce the funding available for libraries.
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