9708 · 7.4
Private costs and benefits, externalities and social costs and benefits flashcards
Revision flashcards for Cambridge 9708 Private costs and benefits, externalities and social costs and benefits (syllabus 7.4). Flip, recall, then mark a real past-paper question.
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MPC vs MSC?
MPC = private marginal cost to the producer. MSC = MPC + marginal external cost. MSC is the true cost to society.
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MPB vs MSB?
MPB = private marginal benefit to the consumer. MSB = MPB + marginal external benefit. MSB is the true benefit to society.
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Negative externality of production?
MSC > MPC — e.g. pollution. Market overproduces: Q_market > Q_social where MSB = MSC.
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Positive externality of consumption?
MSB > MPB — e.g. vaccinations. Market underproduces: Q_market < Q_social.
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What is a Pigouvian tax?
A per-unit tax equal to the marginal external cost at the social optimum — internalises the externality and moves Q_market toward Q_social.
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What is a Pigouvian subsidy?
A per-unit subsidy equal to the marginal external benefit at the social optimum — encourages more consumption/production of goods with positive externalities.
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What is an externality?
A spillover effect of production or consumption on a third party not directly involved in the transaction. It can be positive (a benefit) or negative (a cost).
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Define Marginal Social Cost (MSC).
The total cost to society of producing one extra unit of a good. It is calculated as the sum of the Marginal Private Cost (MPC) and any external costs. Formula: MSC = MPC + External Cost.
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Define Marginal Social Benefit (MSB).
The total benefit to society of consuming one extra unit of a good. It is calculated as the sum of the Marginal Private Benefit (MPB) and any external benefits. Formula: MSB = MPB + External Benefit.
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What is meant by 'deadweight welfare loss' in the context of externalities?
The loss of economic welfare to society that occurs when the market is not at the socially optimal level of output (where MSB=MSC). It represents the value of the welfare that is lost due to overproduction or under-consumption.
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When does market failure occur due to externalities?
Market failure occurs because the price mechanism only accounts for private costs and benefits (MPC and MPB), ignoring external costs and benefits. This leads to an equilibrium output that is not allocatively efficient (where MSB ≠ MSC).