- Consumption externality
- A consumption externality is a cost or benefit that falls on a third party when a buyer uses a good, rather than when a firm makes it.
- Production externality
- A production externality is a cost or benefit that falls on a third party when a firm makes a good, rather than when a buyer uses it.
Four kinds of externality
Can you name the four kinds of externality, and which curves each one splits apart?
Whether an externality comes from making a good or from using it decides which pair of curves splits apart.
A cost that making a good puts on third parties, so marginal social cost (MSC) lies above marginal private cost (MPC).
Can you think of an example?
A dye works pours waste into a river, and anglers downstream catch fewer fish. The works pays nothing for their loss.
A benefit that making a good brings to third parties, so marginal social cost (MSC) lies below marginal private cost (MPC).
Can you think of an example?
A firm trains its apprentices well, and some later take those skills to other employers, who did not pay for the training.
A cost that using a good puts on third parties, so marginal social benefit (MSB) lies below marginal private benefit (MPB).
Can you think of an example?
A smoker lights up in a crowded bus shelter, and everyone waiting breathes in the smoke.
A benefit that using a good brings to third parties, so marginal social benefit (MSB) lies above marginal private benefit (MPB).
Can you think of an example?
A flu jab protects the person who has it, and also makes the people around them less likely to catch flu.