1.3.1 Using Diagrams to Illustrate Externalities Flashcards
define marginal private costs
the cost to a firm of producing/suppling an extra unit of output or the cost to an individual of any economic action/decision
define marginal external costs
costs to third parties from the production/consumption of an extra unit of output
define marginal social costs
total cost to society arising from producing/consuming an extra unit of output
what is the formula for marginal social costs
MSC=MPC+MEC
define marginal private benefits
the benefits to a firm of producing/supplying an extra unit of output, or the benefits to an individual of any economic decision
define marginal external benefits
benefits to third parties from the production/consumption of an extra unit of output
define marginal social benefits
total benefit to society arising from producing/consuming an extra unit of output
what is the formula for marginal social benefits
MSB=MPB+MEB
how can you draw positive externalities using cost and benefit curve diagrams
- draw MPC (supply) and MPB (demand) equilibrium
- shift MPB outwards to form the MSB curve. this causes the marginal social benefit of consumption to be higher than the marginal private benefit
what is the marginal external benefit shown by on a diagram
the vertical difference between MSB and MPB
what does Q2 show
social efficiency as the social cost=social benefit. if we stay at Q1, there is underconsumption, and this causes market failure
