Unit 12 - Markets, Efficiency and Public Policy

Question 1

Define a Market Failure.

Answer 1

When markets allocate resources in a Pareto-inefficient way.

Question 2

Define Marginal Private Cost (MPC).

Answer 2

The cost for the producer of producing an additional unit of a good, not taking into account any costs its production imposes on others.

Question 3

Define Marginal Social Cost (MSC).

Answer 3

The cost of producing an additional unit of a good, taking into account both the cost for the producer and the costs incurred by others affected by the good’s production. Marginal social cost is the sum of the marginal private cost and the marginal external cost.

Question 4

Define Marginal External Cost (MEC).

Answer 4

The cost of producing an additional unit of a good that is incurred by anyone other than the producer of the good.