Could you please explain the meaning of externalities in relation to marginal social cost, marginal social benefit?
Externalities are third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid. Externalities occur outside of the market i.e. they affect people not directly involved in the production and/or consumption of a good or service. They are also known as spill-over effects.
Negative externalities occur when production and/or consumption impose external costs on third parties outside of the market. When negative production externalities exist, social costs exceed private cost. This leads to an over-production of the product if producers do not take into account the externalities.
Marginal social cost = marginal private cost + marginal external cost
From a social welfare viewpoint, we want less output from activities that create an “economic-bad” such as pollution and other types of environmental damage.
There is a revision presentation on negative externalities here
Positive externalities are the external benefits from production and/or consumption
Marginal social benefit – marginal private benefit + marginal external benefit
Where positive externalities exist, the good or service may be under consumed or under provided since the free market may fail to value them correctly or take them into account when pricing the product.
There is a revision presentation on positive externalities here
Here is a link to our revision notes on market failure
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Dates and Locations
AS & A2 Economics - Macroeconomics: National & International Economy (Unit 2), Global/International Economy (Unit 4)
- Tuesday 25 March 2014 - London (Stratford City)
- Wednesday 26 March 2014 - London (Fulham Broadway)
- Thursday 27 March 2014 - Bristol (Cribbs Causeway)
- Friday 28 March 2014 - Birmingham (Star City)
- Tuesday 1 April 2014 - Gateshead (Metro Centre)
- Wednesday 2 April 2014 - Leeds (The Light)
- Thursday 3 April 2014 - Manchester (Salford Quays)
Post-Easter (AS Economics Units 1&2 Combined; Global/International Economy (Unit 4))
- Monday 28 April 2014 - London (Stratford City)
- Tuesday 29 April 2014 - London (Fulham Broadway)
- Wednesday 30 April 2014 - Bristol (Cribbs Causeway)
- Thursday 1 May 2014 - Birmingham (Star City)
- Friday 2 May 2014 - Manchester (Salford Quays)
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