Unit Are there any hidden costs or benefits? Positive & Negative Externalities

Key Terms  Third party- a group or an individual that is not directly involved in a decision/action.  Externalities- the effects of an economic decision on individuals and groups outside who are not directly involved in the decision.  Negative externalities- those costs arising from business activity which are paid by people or organisations outside the firm.

Negative Externalities  Consumers can create externalities when they purchase and consume goods and services.  Pollution from cars and motorbikes  Litter on streets and in public places  Noise pollution from using car stereos or ghetto- blasters  Negative externalities created by smoking and alcohol abuse  Externalities created through the mis-treatment of animals  Vandalism of public property  Negative externalities arising from crime

Positive Externalities  A positive externality is a benefit that is enjoyed by a third-party as a result of an economic transaction. Third-parties include any individual, organisation, property owner, or resource that is indirectly affected.

The role of government  One role for government is to implement economic policies that promote positive externalities. There are two general approaches to promoting positive externalities; to increase the supply of, and demand for, goods, services and resources that generate external benefits.

Positive Externalities  There are plenty of examples of economic activities that can generate positive externalities:  Industrial training by firms : This can reduce the costs faced by other firms and has important effects on labour productivity. A faster growth of productivity allows more output to be produced from a given amount of resources and helps improve living standards throughout the economy. See the revision notes on the production possibility frontier  Research into new technologies which can then be disseminated for use by other producers. These technology spill-over effects help to reduce the costs of other producers and cost savings might be passed onto consumers through lower prices  E ducation : A well educated labour force can increase efficiency and produce other important social benefits. Increasingly policy-makers are coming to realise the increased returns that might be exploited from investment in human capital at all ages.  Health provision: Improved health provision and health care reduces absenteeism and creates a better quality of life and higher living standards.  Employment creation by new small firms

 Identify one negative externality resulting from rising car use in the UK;  The development of new models by car producers  Increased congestion on UK roads  An increased demand for fuel  A rise in the use of public transport  Identify one positive externality which will result from the opening of a new supermarket in town. The supermarket is the largest in the local area, employing over 100 staff. The supermarket has built several new roads in the are to improve access.  Lower prices for local residents  Access to a wider range of services  Quicker journey times for drivers in the area  More employment for local people  An entrepreneur intends to set up a new garage on waste land opposite a housing estate. Which one of the following is not an example of a negative externalities the business might produce?  Greater congestion stemming from customers at the business  Profits made by the new business  Higher house prices due to the improvement of waste ground  Noise made by the new business.

Mark scheme

Mark Scheme

Revision Essentials  Negative Externality – A cost inflicted on other stakeholders when an individual or business makes a choice.  Positive Externality – A benefit shared by other stakeholders when an individual or business makes a choice.