Economics - Externalities Diagram - HELP! Watch

neomilan
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#1
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#1
can someone explain the two diagrames
maybe applied to an example if easier to understand

i'm confused about the labelling, why MSB, MPB, MSC, MPC etc. are where they are... explain why the curves have shift, explain socially optimal and market level etc. and everything else relevant about the two diagrames please

i cannot find any book, out of the 5 i have, that explain this in a way i understand

Thanks

Posotive Externalities:


Negative Externalities:
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MSB
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Hi there.
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neomilan
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(Original post by MSB)
Hi there.
hello MSB marginal social benefit
can you help me
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I_Am_Abbas
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(Original post by neomilan)
can someone explain the two diagrames
maybe applied to an example if easier to understand

i'm confused about the labelling, why MSB, MPB, MSC, MPC etc. are where they are... explain why the curves have shift, explain socially optimal and market level etc. and everything else relevant about the two diagrames please

i cannot find any book, out of the 5 i have, that explain this in a way i understand

Thanks

Posotive Externalities:


Negative Externalities:
Well, the 1st diagram is wrong. MSB and MPB are the wrong way round.

A positive externality occurs when the marginal social benefits exceed marginal private benefits. Since only private benefits are considered when making the decision over consumption or production, the good is under-consumed/produced, for example vaccinations or education. This is why Governments are forced to 'pay' for these, since increasing the quantity provided must increase the cost.

Conversely, a negative externality occurs when social costs exceed private costs of production/consumption, eg polluting production, or listening to very loud music. The shaded area in the diagram shows the deadweight welfare loss due to the good being over produced/consumed.

The socially optimal level is where MSB=MSC, and the free market level is where MPB=MPC. Hence both of these market failures represent a misallocation of resources that are non-optimal.
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neomilan
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(Original post by I_Am_Abbas)
Well, the 1st diagram is wrong. MSB and MPB are the wrong way round.

A positive externality occurs when the marginal social benefits exceed marginal private benefits. Since only private benefits are considered when making the decision over consumption or production, the good is under-consumed/produced, for example vaccinations or education. This is why Governments are forced to 'pay' for these, since increasing the quantity provided must increase the cost.

Conversely, a negative externality occurs when social costs exceed private costs of production/consumption, eg polluting production, or listening to very loud music. The shaded area in the diagram shows the deadweight welfare loss due to the good being over produced/consumed.

The socially optimal level is where MSB=MSC, and the free market level is where MPB=MPC. Hence both of these market failures represent a misallocation of resources that are non-optimal.
ahh i just noticed that the diagram was wrong!
i actually know the diagram, i just didn't notice it was incorrect! thanks

thanks for the explanation, sort of helped me understand it better than before
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I_Am_Abbas
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(Original post by neomilan)
ahh i just noticed that the diagram was wrong!
i actually know the diagram, i just didn't notice it was incorrect! thanks

thanks for the explanation, sort of helped me understand it better than before
Not a problem.

Let me know if you need more help
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neomilan
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(Original post by I_Am_Abbas)
Not a problem.

Let me know if you need more help
i have an exam question that im doing for practise, one minuite i'll just type it....

EDIT:
with reference to external costs, explain the difference between free market and socially optimal level of fishing. illustrate answer with a diagram
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I_Am_Abbas
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(Original post by neomilan)
i have an exam question that im doing for practise, one minuite i'll just type it....

EDIT:
with reference to external costs, explain the difference between free market and socially optimal level of fishing. illustrate answer with a diagram
Fishing I assume they want you to say is an example of a negative externality - i.e. social costs exceed private costs. Draw typical negative externality diagram. Point out that free market level of output exceeds the socially optimal level, the rationale is that whilst individually beneficial to fish, your fishing is to the detriment of society (by reducing fish stocks etc). Not sure how many marks you need, I could tell you more...

Incidentally, with regards to maths modules in your sig, don't do S4 unless you are very competent with stats, it is not easy. M2 is far, far easier (as is M3), but clearly of less relevance to economics. D1 is pointless IMO.
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neomilan
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(Original post by I_Am_Abbas)
Fishing I assume they want you to say is an example of a negative externality - i.e. social costs exceed private costs. Draw typical negative externality diagram. Point out that free market level of output exceeds the socially optimal level, the rationale is that whilst individually beneficial to fish, your fishing is to the detriment of society (by reducing fish stocks etc). Not sure how many marks you need, I could tell you more...

Incidentally, with regards to maths modules in your sig, don't do S4 unless you are very competent with stats, it is not easy. M2 is far, far easier (as is M3), but clearly of less relevance to economics. D1 is pointless IMO.
it's 6 marks

i find mechanics impossible!
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I_Am_Abbas
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(Original post by neomilan)
it's 6 marks

i find mechanics impossible!
For 6 marks, you'll be fine with a diagram and brief explanation. I guess you could include the deadweight welfare loss to society if you wanted to.

Well, D1 may be sensible then. M2 really isn't much harder than M1, M3 is a bit of a jump. S3 isn't much harder than S2 at all, but S4 is a considerable step up. This is on edexcel though, so may not apply to you at all.
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neomilan
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(Original post by I_Am_Abbas)
For 6 marks, you'll be fine with a diagram and brief explanation. I guess you could include the deadweight welfare loss to society if you wanted to.

Well, D1 may be sensible then. M2 really isn't much harder than M1, M3 is a bit of a jump. S3 isn't much harder than S2 at all, but S4 is a considerable step up. This is on edexcel though, so may not apply to you at all.
yeah im on edexcel, i think i'll just redo M2 i did it last week and definitly scored a U because i only answered 40/75 marks and only 15 of those confidently
hopefully i'll become better at it and then re do it in january
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username271381
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I need this thread too. I HATE this part.

Can anyone define, for example, marginal social benefits (or any of the others)? The definition we've been given is 'the social benefits added by producing/ consuming one more unit', or something along those lines, but I really don't understand it. If I understood the definitions I might stand a chance.

I need all the same help as the OP, basically :yy:
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I_Am_Abbas
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(Original post by Quail)
I need this thread too. I HATE this part.

Can anyone define, for example, marginal social benefits (or any of the others)? The definition we've been given is 'the social benefits added by producing/ consuming one more unit', or something along those lines, but I really don't understand it. If I understood the definitions I might stand a chance.

I need all the same help as the OP, basically :yy:
That definition seems perfect, though i'll attempt to clarify.

Marginal social benefit is a measure at each level of output of the incremental sum of total benefits to both the private individual and any external benefits. Hence, in the negative externality diagram it is at a higher 'price' than the mere marginal private benefits (since there are external benefits to additional consumption/production).

Swap some obvious words around for the other definitions
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Country Bumpkin 957
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(Original post by I_Am_Abbas)
Not a problem.

Let me know if you need more help
Please help me too- this is my worst part of economics; in the second diagram I thought that the negative externality was the verticle distance between the two points, so imagine a line dotted up from where MPC=MSB up to where it hits MSC with the resultant triangle made representing the externality.

I don't know what I'm doing.......
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I_Am_Abbas
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(Original post by Country Bumpkin 957)
Please help me too- this is my worst part of economics; in the second diagram I thought that the negative externality was the verticle distance between the two points, so imagine a line dotted up from where MPC=MSB up to where it hits MSC with the resultant triangle made representing the externality.

I don't know what I'm doing.......
Almost right - at one specific quantity of output or consumption (say Q! on the diagram above), the marginal externality is the vertical distance up to the MSC line from the MPC line. At Q! though, the total welfare loss to society is the sum of all the negative externalities to the right of the socially optimal equilibrium, where MSC=MSB, that is, the shaded area.
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username271381
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(Original post by I_Am_Abbas)
That definition seems perfect, though i'll attempt to clarify.

Marginal social benefit is a measure at each level of output of the incremental sum of total benefits to both the private individual and any external benefits. Hence, in the negative externality diagram it is at a higher 'price' than the mere marginal private benefits (since there are external benefits to additional consumption/production).
Swap some obvious words around for the other definitions
I'm so nearly there with this! It's just the bolded bit I don't understand! Would you mind explaining that bit to me please? If you can you're definitely getting repped
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I_Am_Abbas
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(Original post by Quail)
I'm so nearly there with this! It's just the bolded bit I don't understand! Would you mind explaining that bit to me please? If you can you're definitely getting repped
HUGE apologies for the bolded bit in my previous explanation, I meant positive externality diagram! No wonder it was incomprehensible :p:

(Original post by I_Am_Abbas)
Hence, in the positive externality diagram it is at a higher 'price' than the mere marginal private benefits (since there are external benefits to additional consumption/production).
Marginal social benefit = Marginal private benefit + Marginal externality

This means that when positive externalities exist, the marginal social benefit line is higher than the marginal private benefit, as in this link http://www2.hunterlink.net.au/~ddhrg/pix/es5.gif

Because of this, as seen in the diagram, the private market output of Xp is less than the socially optimal output of X*, meaning resources are not allocated efficiently, and government action would be of use to increase welfare

Hope that helps (and I have checked for obvious errors this time!)
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username271381
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(Original post by I_Am_Abbas)
HUGE apologies for the bolded bit in my previous explanation, I meant positive externality diagram! No wonder it was incomprehensible :p:



Marginal social benefit = Marginal private benefit + Marginal externality

This means that when positive externalities exist, the marginal social benefit line is higher than the marginal private benefit, as in this link http://www2.hunterlink.net.au/~ddhrg/pix/es5.gif

Because of this, as seen in the diagram, the private market output of Xp is less than the socially optimal output of X*, meaning resources are not allocated efficiently, and government action would be of use to increase welfare

Hope that helps (and I have checked for obvious errors this time!)
Aha! Got it! Thank you so much! I get it now It's taken me a while but at long last... rep coming your way
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I_Am_Abbas
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(Original post by Quail)
Aha! Got it! Thank you so much! I get it now It's taken me a while but at long last... rep coming your way
Not a problem, let me know if I can be of any more economics help
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redkopite
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(Original post by I_Am_Abbas)
Not a problem, let me know if I can be of any more economics help
sorry to hijack this thread, but i have an exam on this tomorrow and have no idea how to answer the following..any ideas?

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