<EXTERNALITIES>

--SYLLABUS--

--THINK AHEAD--

"How has this 'producer of gas' impacted others?"

"How has this 'producer of music' impacted others?"

"How has this 'consumer of deoderant' impacted others?"

"How has the consumer of durians impacted others?"

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"You should now realise that these 'external' impacts can be both positive, adding to the benefits of others, or negative, creating costs for others, as well as created via the consumption of a good or its production!"

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"Let's look at some definitions!"

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--DEFINITION--

EXTERNALITIES occur when the actions of consumers and producers give rise to SIDE-EFFECTS that impact THIRD PARTIES who are not part of these activities."

--NEGATIVE--

…if the impact on third parties involves COSTS, then it is referred to as a NEGATIVE EXTERNALITY, also known as an EXTERNAL COST.

--POSITIVE--

…if the impact on third parties involves BENEFITS, then it is referred to as a POSITIVE EXTERNALITY, also known as an EXTERNAL BENEFIT.

-PRODUCTION-

…if this cost arises from PRODUCTION activities it is referred to as a ‘NEGATIVE EXTERNALITY OF PRODUCTION’

-PRODUCTION-

…if the benefit arises from PRODUCTION activities it is referred to as a ‘POSITIVE EXTERNALITY OF PRODUCTION’

-CONSUMPTION-

…if this cost arises from CONSUMPTION activities it is referred to as a ‘NEGATIVE EXTERNALITY OF CONSUMPTION’

-CONSUMPTION-

…if the benefit arises from CONSUMPTION activities it is referred to as a ‘POSITIVE EXTERNALITY OF CONSUMPTION’

"In terms of 'goods' they can be classified as...."

-DEMERIT GOODS-

GOODS/SERVICES that create EXTERNAL COSTS are called DEMERIT GOODS.

-MERIT GOODS-

GOODS/SERVICES that create EXTERNAL BENEFITS are called MERIT GOODS.

"Let's look deeper into each type from left to right...."

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