Question

You are considering whether to enter a holiday lights display contest that pays \(\$ 1,000\) to the winner. State whether each of the following constitutes private costs, private benefits, external costs, or external benefits. Check all that apply. [LO 18.1\(]\) a. Increased traffic congestion and difficulty parking on your street. b. Increased electric bill from the holiday lights. c. Winning the holiday lights display contest.

Short answer

a. External cost b. Private cost c. Private benefit

Step-by-step solution

Understanding Private Costs and Benefits

Private costs refer to costs that affect the individual or entity directly involved in a transaction or activity. Examples include expenses you incur personally due to an activity. Private benefits are the gains received personally from an activity or decision.

Understanding External Costs and Benefits

External costs (negative externalities) affect third parties who are not directly involved in the activity. External benefits (positive externalities) also affect third parties, but in a beneficial way.

Analyze 'Increased Traffic Congestion and Difficulty Parking on Your Street'

This is an external cost. Increased traffic congestion and difficulty parking affect the neighbors and other people on your street, who are not directly involved in the contest.

Analyze 'Increased Electric Bill from the Holiday Lights'

This is a private cost. You directly incur the cost of the increased electric bill as a consequence of putting up holiday lights.

Analyze 'Winning the Holiday Lights Display Contest'

This is a private benefit. The prize money you receive for winning the contest directly benefits you personally.

Key concepts

Private Costs

Private costs include any expenses that directly affect you or your resources when you engage in an activity. A great example of this is the increased electric bill you might face when decorating your house with holiday lights for a contest. This cost is something you, the decorator, would directly pay out of pocket. Additionally, private costs are directly related to decisions and actions you take that impact only your own financial situation.
When considering entering events such as a holiday lights display contest, it is crucial to calculate these private costs, as they contribute to your overall financial planning. Making a clear budget for such expenses will help you manage them efficiently.

Private Benefits

Private benefits are the positive outcomes that you, as an individual, receive from engaging in a particular activity. In our scenario of the holiday lights contest, winning the competition and receiving the prize money of $1,000 is a tangible private benefit.
This prize is an advantage that you reap solely because of your personal investment and participation in the contest. Unlike external benefits, private benefits only affect your personal or financial gain, like increased recognition or improved reputation from winning the contest. Such benefits are a key incentive for individuals to participate in activities where they see direct and personal rewards.

External Costs

External costs, often known as negative externalities, impact others who are not involved in the specific activity. An example here is the increased traffic congestion and difficulty parking in your neighborhood resulting from the holiday lights display.
This issue affects your neighbors and other people on the street without them being a part of your contest participation. Such external costs are not paid by you, the participant, but rather are borne by the community or those indirectly affected by your actions. Recognizing and accounting for these costs is essential in understanding the broader impact of your activities.

External Benefits

External benefits, or positive externalities, are advantages that spill over to third parties who are not directly involved in the activity. While external benefits were not explicitly discussed in the holiday lights contest scenario, they are important to understand.
For instance, if your dazzling holiday lights encourage community spirit or attract visitors who support local businesses, those would count as external benefits. These benefits spread beyond your control or direct participation, offering positive effects to the community at large. They play a significant role in fostering cooperation and goodwill within neighborhoods and can often justify the public support or interest in activities that generate such positive spillovers.