Lecture 10: Externalities

Question 1

MPC

Answer 1

Marginal Private Cost

Question 2

MXC

Answer 2

Marginal External Costs

Question 3

MSC

Answer 3

Marginal Social Cost
Or
MSC = MPC + MXC

Question 4

Pigouvian Tax

Answer 4

A Corrective Tax designed to induce private decision makers (buyers and sellers) to take account of the social costs (spillover costs) that arise from a negative externality.

Question 5

MPB

Answer 5

Marginal Private Benefit

Question 6

MXB

Answer 6

Marginal External Benefit

Question 7

MSB

Answer 7

Marginal Social Benefit
Or
MSB = MPB + MXB

Question 8

Pigouvian subsidy

Answer 8

A Corrective subsidy designed to induce private decision makers (buyers and sellers) to take account of the social benefit (spillover benefits) that rise from a positive externality.

Question 9

Negative Externalities

Answer 9

MPC < MSC
The market will tend to over produce
Solution : Pigouvian Tax

Question 10

Positive Externalities

Answer 10

MPB < MSB
Market will tend to underproduce
Solution: Pigouvian Subsidy