1.3.2 - Externalities

• Externalities is the cost or benefit a third party receives from an economic transaction outside of the market mechanism
• social cost = private cost + external cost
• social benefit= private benefit + external benefit
• private costs are costs to an individual economic agent (firm)
• Private benefit is a benefit to a consumer inside the price mechanism.
• Positive externalities or external benefits are benefits of the third party outside the price mechanism.
• Positive consumption externality is when the consumption of a good critics benefit to the third party's outside the price mechanism.
• Positive production externality is when the production of a good creates benefit to third party outside the price mechanism.