Describe Spillovers and externalities

Question

Describe Spillovers and externalities?

Answer 1

a. When profit / expenses of invention are not fully reflected in market demand/ supply schedules, Spillovers or externalities occurs.  Several profit/expenses of a good may “spill over” to 3rd parties.

b. An example of a spillover cost is fumes, that allows polluters to enjoy lower production costs because the firm is passing along the cost of pollution damage or cleanup to society.  As firm does not bear complete rate, it will overallocate resources.

c. Correcting for spillover costs requires that government get producers to internalize these costs.

d. Spillover benefits occur when direct consumption by some individuals impacts third parties.  Public health vaccinations and education are two examples.  Because some of the benefits accumulate to others whereas individuals will demand too little for themselves and resources will be underallocated by the market.