Microeconomics

Table of Contents

1. Topic pack - Microeconomics - introduction
2. 1.1 Competitive Markets: Demand and Supply
3. 1.1 Competitive Markets: Demand and Supply - notes
4. 1.1 Competitive markets - questions
5. 1.1 Competitive markets - simulations and activities
6. 1.2 Elasticities
7. 1.2 Elasticities - notes
8. Section 1.2 Elasticities - questions
9. Section 1.2 Elasticities - simulations and activities
10. 1.3 Government intervention
11. 1.3 Government Intervention - notes
12. 1.3 Government intervention - questions
13. 1.3 Government intervention - simulations and activities
14. 1.4 Market failure
15. 1.4 Market failure - notes
16. Section 1.4 Market failure - questions
    1. Market failure - short answer
    2. Externalities - short answer
    3. Externalities & allocative efficiency - short answer
    4. Externalities - self-test questions
    5. Public goods - short answer
    6. Merit goods - short answer
    7. Demerit goods - short answer
    8. Types of goods - self-test questions
    9. Government responses - short answer
    10. Common access resources - activities
    11. Overexploitation - questions
    12. Sustainability - report
    13. Plastic bags - carrying the weight of the environment?
    14. Running cars on biofuels can be unethical
    15. Cement - the hidden polluter?
    16. African roses - a sign of change
    17. Congestion charging
    18. Putting a price on carbon
    19. Power bills to soar in 'green reforms'
    20. Beyond Kyoto
    21. Economic growth cannot continue
    22. The rush to find Jade
    23. Chopstick tax
    24. Taxing light bulbs - that's a bright idea
    25. Trading pig excrement
    26. Congestion pricing
    27. Packaging tax
    28. Airport expansion plans
17. Section 1.4 Market failure - simulations and activities
18. 1.5 Theory of the firm
19. 1.5 Theory of the firm - notes (HL only)
20. Section 1.5 Theory of the firm - questions
21. Section 1.5 Theory of the firm - simulations and activities
22. Print View

Externalities - short answer

Positive and negative externalities

Question 1

Distinguish between private costs and social costs using examples to illustrate your answers.

Question 2

Explain the difference between (i) a social cost and a negative externality and (ii) a social benefit and a positive externality.

Question 3

Re-write and fill in the gaps in the text below:

The existence of negative externalities will lead to a misallocation of resources and over-production at the free market price. The existence of positive externalities will cause a misallocation of resources at the free market price as there will be .........................................................................

Negative externalities cause a divergence between private and social cost.

The private cost is the internal money cost of production incurred by the firm i.e. costs such as ................................................................... Which must be paid to carry out production, and which would appear in the firm's accounts.

The social cost, on the other hand, is the real cost to society; it is the private internal costs plus ....................................

Similarly, if the firm's production decisions were to generate positive externalities, such as the beneficial effects arising from the provision of employment, then there would be a divergence between private and social benefit.

The private benefit is the money value of the benefits accruing internally to the firm from production activity e.g. in the form of sales revenues.

The social benefit, on the other hand, is the private benefit plus ..............................

So, social cost = ...................... + ...................... and social benefit = ...................... + ......................

The difference between the private and social cost is therefore the value of the ...................... and the difference between the private and social benefit is therefore the value of ......................