4.1.8.4 Externalities NOTES

What are externalities in economic terms?

• The internal costs a company bears during production

• The divergence between private and social costs and benefits

• The taxes imposed on a product

• The profits a company makes from its operations

What does it mean by private costs and benefits?

• Governmental expenses and revenues

• Environmental impacts of industrial activities

• Expenses and benefits for individuals or firms directly involved in a transaction

• Costs and benefits experienced by the entire society

What are social costs?

• Costs borne solely by the producing company

• Revenues generated from a public service

• Benefits received by the local community

• The sum of private and additional societal costs

What typically happens when there is a negative externality?

• The product is banned from the market

• The product is fairly priced

• The product is overproduced

• The product is under-produced

Why might a firm overproduce when there are negative externalities?

• To comply with government regulations

• To maximize profits by ignoring external costs

• To enhance community welfare

• To reduce the harmful effects on society

What is a common consequence of positive externalities?

• Increased government subsidies

• Perfect allocation of resources

• Under-production or under-consumption of the good or service

• Overconsumption of the good or service

How do well-defined property rights affect externalities?

• They decrease company profits

• They exacerbate the effects of externalities

• They have no impact on externalities

• They help internalize the costs and benefits of actions

What leads to market failure in the context of externalities?

• High levels of government intervention

• Absence or poor definition of property rights

• Complete internalization of external costs and benefits

• Efficient resource allocation

Why might a factory not invest in pollution control technologies?

• If it is focused on employee welfare

• If it is reducing its production scale

• If it is aiming to increase its operational costs

• If it can emit pollution without penalty

What is likely to happen if inventors cannot claim ownership of their inventions?

• Reduction in negative externalities

• Decreased provision of innovative goods and services

• Stabilization of market prices

• Increased investment in research and development