Cambridge International as and a level Economics Ebook

135
Chapter 6: Basic economic ideas and resource allocation

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However, you do not consider the further costs that you 
may be imposing on others in terms of your contribution 
to road congestion, to atmospheric pollution and to 
possible car accidents. In this situation, a negative
 
externality exists, the cost of which is an external cost. 
Th
e situation is illustrated in 
Figure 6.5
. Here, private 
costs are part of the social costs involved in a decision. 
However, they do not represent all of the social costs. Th
e 
diff erence shown between the two is the external cost or 
the cost of the negative externality.
Private, external and social benefits
A similar situation can also exist with benefi ts. Th
e 
social 
benefi ts
of a decision are all of the benefi ts that accrue 
from that decision. Th
e 
private benefi ts
are those that 
accrue solely to the individual making the action. Again, 
these may or may not be the same. Any diff erence between 
them is the 
external benefi ts
.
Th
erefore social benefi ts 
=
private benefi ts 
+
external 
benefi ts
It is possible that the social benefi ts of a decision may 
exceed the private benefi ts. If this is the case, then a positive 
externality that produces an external benefi t is said to exist. 
For example, if you make a decision to go to the doctor to 
be inoculated against a particular disease, then clearly you 
receive the private benefi t of not catching that particular 
disease. However, you may not be the only one to benefi t. 
Th
e fact that you do not get the disease has some possible 
benefi t to all others with whom you come into contact and 
who will now not catch the disease from you.
Children being vaccinated in Africa