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    Demerit goods, negative externalities, and social costs
    Hi guys I am really confused about these terms, they are all similar and I just seem to get mixed up! If someone could explain them to me I would be truely greatful

    Thanks!
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    (Original post by bonana567)
    Demerit goods, negative externalities, and social costs
    Hi guys I am really confused about these terms, they are all similar and I just seem to get mixed up! If someone could explain them to me I would be truely greatful

    Thanks!
    demerit good - goods that are overproduced and overconsumed due to the fact people are not fully aware of the costs/negative impact associated with producing and consuming the product - result of information failure

    negative externality - cost imposed on a third party as a result of an economic activity. Not reflected in market price ie participant in economic activity does not pay for this cost

    social cost - cost imposed on the whole of society resulting from an economic activity. If social cost is different to private cost of the activity, a negative production externality is present

    sorry if being tooo simplistic MOTD is about to start!!!!
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    The size of the negative externality is the difference between private costs and social costs.
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    (Original post by bonana567)
    Demerit goods, negative externalities, and social costs
    Hi guys I am really confused about these terms, they are all similar and I just seem to get mixed up! If someone could explain them to me I would be truely grateful (sp)

    Thanks!
    An externality occurs when an innocent third party is affected by an economic decision - such as the production/consumption of goods.

    A negative externality exists when that person, who never should have been involved, is affected in a bad way - for example if your flat mate at uni played really loud music way past bed time and you couldn't sleep because of it. A really beautiful garden could cause positive externalities if people are really happy when they pass by and see it But what one person might find beautiful, others may not, so externalities are hard to quantify.

    Demerit goods are goods that society would generally view as bad due to its effects on society, such as smoking. They are often over consumed as people do not fully realise the costs of the action, or ignore them (people know smoking "kills" yet they do it anyway.) Demerit goods often cause negative externalities when consumed (think of passive smoking). The opposite of merit goods. Most people would say education is "good" as smoking is "bad".

    Whilst a negative externality is bad because others (not the consumer) are affected, demerit goods are viewed as bad because of the negative effects to the consumer himself. Smoking is "bad" because the smoker essentially suffers. Just so happens negative externalities can be produced.



    Social cost = private costs + external costs.
    It is basically the total cost to society - which is also hard to quantify. The thing that makes social cost different to private cost is the existence of externalities.

    (Original post by therealOG)
    If social cost is different to private cost of the activity, a negative or positive externality is present.


    Further reading if you're still stuck, OP:
    http://www.frbsf.org/education/activ...2002/0211.html
    http://tutor2u.net/economics/content...ernalities.htm
 
 
 
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