LET’S TRY ONE
A workshop sells furniture while its noise disturbs nearby residents who are not part of the sale. Which is the stated external cost?
The disturbance to nearby residents.
The residents are affected outside the furniture transaction.
Learning steps & teaching tips
Identify a stated external cost or benefit and distinguish it from costs borne only by the buyer and seller.
- Identify the buyer, seller and other affected people.
- Separate private costs from effects on third parties.
- Use evidence of the stated effect without assuming one particular policy response is required.
Try it together
Invent a transaction with a benefit and a cost outside it. Draw who pays or gains and list one measurement that would help evaluate each spillover.
Look for a third party affected by the activity but not included in its transaction.