Ch. 8

• What is an externality?

  A cost or benefit external to a market
• How do externalities affect third parties?

  They may affect third parties not involved
• What are private costs?

  Costs incurred by an individual or firm
• What are external costs?

  Costs borne by a third party not reflected in prices
• What are social costs?

  The sum of private and external costs
• What are social benefits?

  The sum of private benefits and external benefits
• What are private benefits?

  Benefits received by an individual or firm
• What are external benefits?

  Benefits received by society not reflected in prices
• What is a production externality?

  An externality affecting the production side of a market
• What is welfare loss?

  The social loss when market equilibrium diverges from optimum
• What is a consumption externality?

  An externality affecting the consumption side of a market
• What is market failure?

  A situation where free market equilibrium is not optimal
• What does marginal social benefit (MSB) represent?

  The additional benefit from consuming an extra unit
• What does marginal social cost (MSC) represent?

  The cost to society of producing an extra unit