What is Externalities?

1 year ago

Externality – Action by either a producer or a consumer which affects other producers or consumers, but is not accounted for in the market price.

Marginal external cost – Increase in cost imposed externally as one or more firms increase output by one unit.

Marginal social cost – Sum of the marginal cost of production and the marginal external cost.

                                      MSC = MC + MEC

Marginal external benefit – Increased benefit that accrues to other parties as a firm increases output by one unit.

Marginal social benefit – Sum of the marginal private benefit plus the marginal external benefit.

                                          MSB = D + MEB

Bijay Satyal
Dec 1, 2021
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