Externalities and social costs and benefits
Introduced| English | Meaning |
|---|---|
| marginal social cost/ˈmɑːdʒɪnl ˈsəʊʃl kɒst/ | The additional total cost to society of producing or consuming one more unit, including private and external costs. |
| marginal private cost/ˈmɑːdʒɪnl ˈpraɪvət kɒst/ | The additional cost borne by the decision-maker from producing or consuming one extra unit. |
| marginal social benefit/ˈmɑːdʒɪnl ˈsəʊʃl ˈbenɪfɪt/ | The additional benefit to society as a whole from producing or consuming one extra unit. |
| social optimum/ˈsəʊʃl ˈɒptɪməm/ | An allocation that maximises overall social welfare, commonly where marginal social benefit equals marginal social cost. |
| deadweight welfare loss/ˈdedweɪt ˈwelfeə lɒs/ | The net social benefit lost when output differs from the quantity that maximises total social surplus. |
| tradable pollution permits/ˈtreɪdəbl pəˈluːʃn ˈpɜːmɪts/ | tradable pollution permits |
The full cost of a decision
- A factory's price covers its wages and materials — but not the asthma its smoke causes downwind. Society pays that hidden bill.
- Weighing all the costs and benefits — social, not just private — is how economists judge whether a market produces the right amount.
Marginal social cost (MSC) equals marginal private cost plus the:
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MSC = MPC + external cost imposed on third parties.
The social optimum is where:
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Society is best off where marginal social cost equals marginal social benefit.
Marginal social benefit = marginal private benefit + the external ______.
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MSB = MPB + external benefit.
Social cost and benefit
- Marginal social cost 边际社会成本 (MSC) = marginal private cost 边际私人成本 + the external cost.
- Marginal social benefit 边际社会收益 (MSB) = marginal private benefit + the external benefit.
- The social optimum 社会最优 is where MSC = MSB.
Externalities shift the social curve
A negative externality means the social cost is above the private supply curve; the free-market quantity is then too high.
The gap between the market outcome and the social optimum creates a deadweight welfare loss.
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Over- or under-production relative to the optimum wastes welfare.
Welfare loss
- A free market produces where private cost = private benefit — usually not the social optimum.
- The gap creates a deadweight welfare loss 无谓损失 (the shaded triangle).
With a negative externality the market over-produces; the welfare-loss triangle measures the cost to society.
Match each externality to a correcting policy.
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Tax/permits curb over-production; subsidies boost under-provided goods.
Correcting it
- Negative externalities: taxes, regulation, tradable pollution permits 可交易污染许可.
- Positive externalities: subsidies, free provision, information campaigns.
Private optimum ≠ social optimum. The market clears where private marginal cost = private marginal benefit. Add the externality and the social optimum is at a different quantity — that gap is the failure.
You've got it
- MSC = MPC + external cost; MSB = MPB + external benefit
- the social optimum is MSC = MSB; the market misses it → deadweight welfare loss
- correct with taxes/permits (negative) or subsidies (positive)