a) Costs and benefits

• define social cost

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

• state how to calculate social cost

• social cost = private cost + external cost

• define social benefit

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

• state how to calculate social benefit

• social benefit = private benefit + external benefit

• define private cost

• the total price paid by

• → a firm to produce a good or service

• or

• → a consumer to consume a good or service

• define private benefit

• the total

• → profit earned by a producer from producing a good or service

• or

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

• define external cost

• the cost to third parties

• → produced by the negative externality

• → produced by the consumption or production of a good or service

• state what causes an external cost

• when social cost > private cost

• define external benefit

• the benefit to third parties

• → produced by the positive externality

• → produced from the consumption or production of a good or service

• state what causes an external benefit

• when social benefit > private benefit