2. 2.3 Social Costs and Benefits Page 75

3. Market Failure 市场失灵
Market failure’ is when market forces are not efficient.
Signs of market failure:
(1) Shortage 短缺
(2) Surpluses 过剩
High prices
Bad quality

4. Private Costs
私人成本
Private Benefit
External Costs
外部成本
External Benefit
Social Costs
社会成本
Social Benefit

5. Private Costs Private Benefit Your Cost
Eg: you buy a car $20,000 – your private cost
Your Benefit
You can travel faster and easier – your private benefit

6. External Costs External Benefit
Other people’s cost because of your decision
Eg: Your car causes more traffic and pollution –
Other people’s benefit because of your decision
Your friend can travel in your car –

7. An external cost is: A cost created by a firm which it pays for
A cost created by firms, that 3’rd parties pay for
A cost created by society, that private firms pay for
A cost paid for by the government

8. An external cost is: A cost created by a firm which it pays for
A cost created by firms, that 3’rd parties pay for
A cost created by society, that private firms pay for
A cost paid for by the government

9. External benefits

10. Social Costs Social Benefit Private Cost + External Cost
= your car cost ($20,000) + Pollution to others
Private Benefit + External Benefit
= you can drive + and your friends can ride

11. Positive and Negative Externalities
People who are affected indirectly are know as 3’rd parties第三方
Are when the consumption and production of some products may create ‘Externalities’ 外部 to third parties 第三方.

12. Positive Externalities

13. Positive and Negative Externalities
In a negative externality, the social cost is lower
than the private cost because the externality causes an ‘external cost’ to third parties.
SC<PC
In a positive externality, the social benefit
is greater than the private benefit because the externality causes ‘external benefits’ to third parties.
SB>PB
What governments want is:
total social benefit = total social cost

14. Definitions:
Private costs – costs those who are consuming or producing a product
External costs – costs that effect third parties
Social costs – costs to a society of an economic activity

15. An economic use of resources?
If social benefit > total social cost
Economic welfare 經濟福利 can be improved by encouraging more production and consumption
If total social benefit < total social cost
Economic welfare 經濟福利 can be improved by reducing production and consumption

16. A resources is said to be economical if:
Social benefits are greater than private benefits
Social costs are greater than social benefits
Private costs are less than private benefits
Social costs are less than social benefits

17. A resources is said to be economical if:
Social benefits are greater than private benefits
Social costs are greater than social benefits
Private costs are less than private benefits
Social costs are less than social benefits

18. Correcting market failure
How can a government in a mixed economy ensure that firms and consumers take account of the external costs and benefits of their decisions and actions?
Government has new plan to tax the worst polluters

19. Income
Taxes
If government increases taxes then Cost of production↑ and Supply ↓

20. Correcting market failures
To increase external benefits
Make sure the public sector provides socially and economically wanted goods and services, subsidies for vaccines
Provide subsidies 补贴 to private sector 私营部门 firms to reduce the cost of production external benefits, subsidies for renewable energy
Make rules to encourage firms to change their production methods

21. Population
Subsidies
If the government gives a subsidy then the Cost of production ↓ and Supply ↑

22. If the production of a good or service results in high external benefits, but low private benefits, then:
Private firms will produce more than society wants
Private firms will produce just enough to satisfy the wants of society
Private firms will produce less than society wants
Private firms will use resources to produce something else

23. If the production of a good or service results in high external benefits, but low private benefits, then:
Private firms will produce more than society wants
Private firms will produce just enough to satisfy the wants of society
Private firms will produce less than society wants
Private firms will use resources to produce something else

24. Correcting market failures
To reduce external costs
Raise taxes on firms that create external costs to reduce their profits
Increase taxes on products that are harmful to raise their prices and discourage their use
Make rules and give fines to discourage the production or consumption of products that are harmful

25. Review 1. What is an Externality?
When EXTERNAL benefits or external costs are on someone other than the original decision maker.
2. Why are Externalities Market Failures?
The free market fails to include external costs or external benefits. 25

26. Which of the following represents an external benefit?
A firm that gets a discount for buying 1000 units instead of just 5
An old building blackened by traffic pollution
An increase in a firm’s revenue because of the success of its advertising
Vaccinations that keep people from getting sick

27. Which of the following represents an external benefit?
A firm that obtains a discount for buying materials in bulk
A historic building blackened by traffic pollution
An increase in a firm’s revenue resulting from the success of its advertising
Vaccinations that keep people from getting sick

28. Which of the following is likely to be an external
cost of building a new airport?
The price paid for the land
The cost of materials
The noise caused by construction
Wages paid to workers

29. Which of the following is likely to be an external
cost of building a new airport?
The price paid for the land
The cost of materials
The noise caused by construction
Wages paid to workers

30. Classwork Page 86 Activity 2.26 Write your answers
on the board when you finish