b) Externalities

• state what causes market failure in terms of positive externalities of consumption

• when goods and services that produce positive externalities of consumption are under-consumed

• state what causes market failure in terms of negative externalities of consumption

• when goods and services that produce negative externalities of consumption are over-consumed

• state what causes market failure in terms of positive externalities of production

• when goods and services that produce positive externalities of production are under-produced

• state what causes market failure in terms of negative externalities of production

• when goods and services that produce negative externalities of production are over-produced

• define marginal social cost

• the cost to society produced from the production or consumption of one unit of a good or service

• define marginal social benefit

• the benefit to society produced from the production or consumption of one unit of a good or service

• define marginal private cost

• the price paid by a

• → firm to produce one unit of a good or service

• or

• → consumer to consume one unit of a good or service

• define marginal private benefit

• the

• → profit earned by a firm from producing one unit of a good or service

• → utility earned by a consumer from consuming one unit of a good or service

• define welfare loss

• the decrease in the productive efficiency of the economy due to a misallocation of resources

• define welfare gain

• the increase in the productive efficiency of the economy due to a socially optimum allocation of resources