1.1.6 Externalities

External costs of production

a) Definition of external costs - External costs are negative third-party or spillover effects as a result of production or consumption.

b) Examples of external costs:

• Pollution

• Congestion

• Environmental damage

External benefits of consumption

c) Definition of external benefits - External benefits are positive third-party or spillover effects as a result of production or consumption.

d) Examples of external benefits:

• Education

• Healthcare

• Vaccinations

e) Costs and benefits

Social Costs

• Definition: Social costs are the total cost to society of an activity, including both private costs and external costs.

• Formula: Social Costs = Private costs + External costs

Social Benefits

• Definition: Social benefits are the total benefit to society of an activity, including both private costs and external costs.

• Formula: Social Benefit = Private Benefit + External Benefit

Definitions:

Private cost - Internal costs faced by the producer or consumer directly involved in a transaction.

External cost - External costs are negative third-party or spillover effects as a result of production or consumption.

Private benefit - The benefit, satisfaction or utility derived by a producer or consumer directly involved in a transaction.

External benefit - External benefits are positive third-party or spillover effects as a result of production or consumption.