Externalities - Definition Externalities Chapter 5 Positive...

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1 Externalities Chapter 5 Definition When the activity of one entity (person/firm) directly affects the welfare of another in a way that is external to the market mechanism (not transmitted by prices) that effect is an externality . Costs and benefits in production : • External costs in production – where MSC > MPC – e.g. air and water pollution, housing development on green belt areas, destruction of hedgerows and wildlife, noise, pollution, anti-social behaviour, External benefits in production – where MSC < MPC – e.g. human resource development, research and development in industry Positive and Negative Externalities Costs and benefits in consumption: • External costs in consumption – where MSB < MPB – e.g. passive smoking, litter, noise, anti-social behaviour • External benefits in consumption – where MSB > MPB – e.g. preventative health care – vaccinations, public transport, attractive gardens, bathing regularly! Positive and Negative Externalities
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This note was uploaded on 06/02/2011 for the course ECON 221 taught by Professor Gordanier during the Fall '08 term at South Carolina.

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Externalities - Definition Externalities Chapter 5 Positive...

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