Negative Externalities Flashcards

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What is a negative externality?

A cost to others from an activity, not paid by buyer or seller.

People not part of the deal but still affected.

Air pollution from a factory and noise from a late-night bar.

A cost paid by the consumer or the producer making the choice.

A cost on others outside the deal. They do not choose it.

Social cost equals private cost plus external cost.

Social cost is higher than private cost.

The market price ignores external costs, so too much is made or used.

Output is higher than the best level for society.

A firm's action harms others, like smoke or waste, beyond private costs.

A consumer's action harms others, like second-hand smoke or loud music.

They pay only their private costs, not the wider harm to others.