A situation in which the free market mechanism does not lead to an optimal allocation of resources, e.g. where there is a divergence between marginal social benefit and marginal social cost
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Marginal social cost (MSC)
The cost to society of producing an extra unit of a good
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Externality
A cost or a benefit that is external to a market transaction, and is thus not reflected in market prices
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Consumption externality
An externality that affects the consumtion side of a market, which may be either positive or negative
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Production externality
An externality that affects the production side of a market, which may be either positive or negative
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Private cost
A cost incurred by an individual (firm or consumer) as part of its production or other economic activities
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External cost
A cost that is associated with an individual's (a firm or household's) production or other economic activities, which is borne by a third party
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Internalising an externality
An attempt to deal with an externality by bringing an external cost or benefit into the price system
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Other cards in this set
Card 2
Front
Marginal social cost (MSC)
Back
The cost to society of producing an extra unit of a good
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