b) Externalities

during market failure

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

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

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

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

marginal social cost = the cost to society produced by the consumption or production of one unit of a good or service

marginal social benefit = the benefit to society produced by the consumption or production of one unit of a good or service

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

marginal private benefit = the

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

or

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

welfare loss = the decrease in the productive efficiency of the economy due to a misallocation of resources

welfare gain = the increase in the productive efficiency of the economy due to a socially optimum allocation of resources