a) Costs and benefits

a) distinction between external costs, private costs, and social costs

b) distinction between private benefits, external benefits, and social benefits

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

• private cost + external cost = social cost

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

• private benefit + external benefit = social benefit

private cost = the total cost paid by a firm to produce or the total cost paid by a consumer to consume a good or service

private benefit = the profit earned by a firm from producing or the utility earned by a consumer from consuming a good or service

external cost → negative externality = when producing or consuming a good or service produces a negative spillover effect

• occur when social cost > private cost

external benefit → positive externality = when producing or consuming a good or service produces a positive spillover effect

• occur when social benefit > private benefit