Economics IGCSE Edexcel - Externalities

Externalities: the spill over effect of consumption or production on a 3rd party.

Private cost - cost to the factory such as wages, raw materials and rent.

External cost - cost to the 3rd party. E.g. pollution, congestion.

Social cost = private cost + external cost

Social benefit = private benefit (profit) + external benefit

Government policies to deal with externalities:

1. Taxation - such as carbon tax or plastic bag taxes which decrease demand for the product.
2. Subsidies - this increases the incentive to be non-polluting.
3. Fines - punishes those who heavily pollute to make sure they never pollute again and to cover the cost created by the externalities.
4. Government regulation - regulations to control negative externalities.