<EXTERNALITIES>

--SYLLABUS--

--THINK AHEAD--

"How has this 'producer of gas' impacted 'third parties"

"How has this 'producer of music' impacted 'third parties?"

"How has this 'consumer of deoderant' impacted 'third parties"

"Why is the consumption of durians on trains banned in Singapore?"

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.

"We can see from the situations above that they can be both..."

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

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

"...they can result from the production process..."

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

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

"...or from the consumption process..."

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

GOODS/SERVICES that create EXTERNAL COSTS are called DEMERIT 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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