Economies of scale• You have 7 minutes to come up with a role

play where you pretend you are employees in a firm and you plan a scene which illustrates a particular economy or diseconomy of scale.

• The class have to guess which EofS it is .

Externalities• What is each picture showing?• What is the impact on society of each of the

following?

ExternalitiesAims

- To identify and explain externalities- To have at least five examples of positive and negative externalities

Key ConceptsNegative externalityPositive externality

External costExternal benefit

Definition• Externalities: costs or benefits of a transaction

that inflict a third party, who are not compensated.

• Externalities of consumption: When consuming a good/service impacts on others (ie smoking)

• Externalities of production: When producing a good/service impacts on others (ie construction -noise-)

Question • Think of 3 more externalities of:

• 1) Consumption • 2) Production

You must know…• Positive externalities are beneficial to the third

party– eg. education, vaccination, restoration of historic

buildings, flood protection, +benefits of immigration

• Negative externalities: are costly to the third party– eg. loud music, traffic, pollution, overcrowding,

resource depletion.

The Theory • Social costs = private costs + external costs• Social benefits = private benefit + external

benefit

Private• Private benefits: benefits that only the firm or

consumer receives, not the third party– eg. Satisfaction of listening to music,

• Private costs: costs that inflict the firm or consumer only and not the third party– eg. purchases of raw material, lung cancer, cost of

cigarettes

External (the externality bit)• External costs: costs of

consumption/production that inflict the third party– eg. noise pollution, air pollution, traffic congestion

• External benefits: benefits of consumption/production that inflict the third party– eg. vaccination

Private benefits

External CostsExternal benefits

Private Costs

1. Smoking- ‘High’ from the drug 1. Smoking- Cough, stained fingers, stained teeth, smelly clothes and breath

1. Smoking- Having to breath the smoke which can be harmful to people’s health2. Cigarette butts lying on the ground3. Discolouring of walls

Think of 4 products and make a table like this one showing the benefits and costs.

Should the government intervene?

• Without government intervention producers and consumers will produce a high level of negative externalities...

• And producers and consumers will have little incentive to make decisions that create positive externalities.

What policies could the government implement to…

• 1) Stop individuals from dropping litter• 2) Encourage house owners to improve their local area• 3) Encourage people to take vaccinations to stop the spread of

disease• 4) Stop people from smoking • 5) Encourage people not to drink alcohol to excess• 6) Stop firms from polluting rivers and emmiting high levels of

carbon emissions• 7) Encourage people to take public transport instead of using cars

Combating negative externalities

• Think about the different advertising campaigns you have seen.

• Which ones can you remember and why?

Combating Negative Externalities

Your task

• Research and find out about a negative externality that exists today.

• Make an advert which explains the extent of the problem and the way it affects third parties.

• Encourages people to be more responsible• Offers a variety of solutions to the problems.

When watching DVD (22 minutes),what has caused the externality?What problems does this cause?

Be ready for discussion afterwards.