Private costs/Benefits

• Social Costs = Private Costs + External Costs
• • Social Costs: the total costs of a particular action borne by all the society.
• • Private Costs: those costs that are incurred by an individual who produces a good or service.
• • External Costs: those costs incurred and paid for by third parties not involved in the action.
• Marginal Social Costs = Private Marginal Costs + External Marginal Costs
• • Marginal Social Costs: the total cost society pays for the production of another unit or for taking further action in the economy.
• • Private Marginal Costs: the change in the producer's total cost due to producing an additional unit of a good or service.
• • External Marginal Costs: the cost to a third party from the consumption/production of one extra unit..
• Social Benefits = Private Benefits + External Benefits
• • Social Benefits: the total benefits arising from a particular action.
• • Private Benefits: benefits that accrue to individuals who produce and consume a particular good.
• • External Benefits: occurs when producing or consuming a good causes a benefit to a third party.
• Marginal Social Benefits = Marginal Private Benefits + Marginal External 
• • Marginal Social Benefits: the satisfaction experienced by consumers/producers of a specific good, plus the overall environmental and social benefits.
• • Marginal Private Benefits: the total marginal benefits of every consumer for each quantity of good consumed.
• Marginal External Benefits: the benefit from consuming one more unit of a good or service that falls on people other than the consumer
• • Externalities: where the actions of producers or consumers give rise to side effects on third parties who are not involved in the action; sometimes referred to as spillover effects.
• Negative Externalities: occur when the consumption or production of a good causes a harmful effect to a third party.
• Positive Externalities: occur when the consumption or production of a good causes a harmful effect to a third party.
• Deadweight Welfare Loss: A deadweight loss is a cost to society created by market inefficiency, which occurs when supply and demand are out of equilibrium.
• Moral Hazard: when one party takes actions that the other party cannot observe but will affect both of them
• Adverse Selection: occurs when there is asymmetric (unequal) information between buyers and sellers. This unequal information distorts the market and leads to market failure.
• • Cost-Benefit Analysis (CBA): a method for assessing the desirability of a project, taking into account the costs and benefits involved.
• Stages in a Costs-Benefits Analysis

  1. Identification of all relevant costs and benefits.
  2. Putting a monetary value on all relevant costs and benefits.
  3. Forecasting future costs and benefits (where appropriate).
  4. Decision-making - the interpretation of the results from CBA.