1.3

• What are externalities?


  Externalities are the costs or benefits that are external to an exchange. They are their party effects that are ignored by the price mechanism
• What is a third party?


  A third party is an individual or group not involved in the consumption or production of a good or service. They are however affected by it.
• What are private costs?


  The costs incurred by an individual or firm as part of its production or consumption of a good or service.
• What are external costs?


  the costs associated with an individuals' (firm or consumer) economic activities or production which are borne by a third party.
• What is the formula for social costs?

  Social costs = private costs + external costs
• What are the social costs?

  The private costs and external costs added together.
• What are positive externalities?

  Positive externalities create external benefits to third party not associated with the production of a good or service.
• What are private benefits?


  Benefits accruing to those taking particular actions- producer or consumer.
• What are external benefits?


  Benefits that accrue as a consequence of externalities to third parties not involved in their production and consumption.
• What are social benefits?

  Private benefits and external benefits added together.
• What is the formula for social benefits?

  Social benefits = private benefits + external benefits
• What are the marginal social costs (MSC)?


  The total cost to society of producing an extra unit of output.

  MSC=MPC+MEC
• What are the marginal private costs (MPC)?


  Costs to the producing firm of producing an additional unit of output or costs to an individual of any economic action.
• What are marginal external costs (MEC)?


  Cost to third parties from the production of an additional unit of output.
• What are the marginal private benefits (MPB)?


  Benefits to the consumer of consuming an additional unit of output.
• What are marginal external benefits (MEB)?


  Benefit to third parties from the consumption of an additional unit of output.
• What are the marginal social benefits (MSB)?

  MSB= MPB +MEB