Externalities - short answer
Letīs Do Some Economics
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 ......................
