Review of Spillover Cost and Benefits

In Chapter 30 we are introduced to the topic of spillovers. Spillovers, which can also be called externalities, are defined as either the cost or benefit accruing to a third party that is external to a market transaction. An example would be if you decided to play loud music in the middle of the night, the negative externality may be that your neighbor can no longer fall back asleep. There are also such things as spillover costs and benefits. Spillover costs are when there is an overproduction of a product and an over allocation of resources to this product (wasted resources on producing too much of a good). Spillover benefits are the exact opposite of this, there is an underproduction and an underallocation of resources. One key difference in the graphs between a spillover benefit and a spillover cost curve is the equilibrium output. In a cost curve the equilibrium output is greater than the optimal output, while in a benefit curve the equilibrium is less than the optimal output. I’ve attached below the graphs for both a spillover cost and a spillover benefit curve:

Spillover Benefit:

Spillover Cost: