1. How do negative externalities lead to market failure 2. How do postitive externalities lead to market failure 3. How negative/positive externalities divergence between private and social costs
1.Negatives externalities are a market failure as more is produced than is beneficial to society e.g pollution. Thus we want to tax the product with negative externalities so the socially optimum amount is produced
2.Positive externalities are a market failure as less is produced/consumed than is beneficial to society e.g education. Thus we want to subsidise the product with positive externalities so the socially optimum amount is produced/consumed.
3.The difference between private and social cost is the externality - which can be positive or negative.
For negative externalities; the social cost of production exceeds the private cost, i.e. it costs me £100 to burn coal but the cost to society is £200.
For positive externalities; the social benefit of consumption exceeds the private cost, i.e. privately your education benefits just you, however, when we consider the social impacts of your education we see that the benefits exceed the ones you personally received. For example you may go on to become a doctor which benefits society as a whole.