Externalities Practice Price Key Concepts: Marginal Social Benefit (MSB): overall benefits to ALL of society, including consumers and third parties Marginal Social Costs (MSC): overall costs to ALL of society, including producers and third parties Marginal Private Benefit (MPB): determines the demand, consumers are willing to purchase a product based on its private benefits specifically to them. Marginal Private Costs (MPC): determines the supply, producers are willing and able to produce only according to their specific marginal costs. Positive Externality, or Marginal External Benefit (MEB): spillover benefits to someone other than the buyers of the good. External benefits to a third-party. Negative Externality or Marginal External Cost (MEC): spillover costs to someone other than the producers of the good. External costs to a third party. Allocationficient (Socially Optimal): occurs when the market is producing the exact quantity that society wants, based on where MSB=MSC (which is usually where supply crosses demand, unless there is an externality.) Market Failure: occurs when the correct quantity that society wants is not met. Usually caused by an externality. Causes DWL Formulas to Know: 1. MSB = + the positive externality 2. = MPC + the negative externality 3. If there is no externality: MSB = MPB = Demand 4. If there is no externality: MSC = MPC = Supply 5. Positive Externalities cause DWL due to 6. Negative Externalities cause DWL due to 7. As long as MEB & MEC equal _ the market quantity will be socially optimal. 8. A positive externality is calculated by the (vertical, horizontal) difference between the D and MSB and is measured in (dollars, units of quantity). Externality Examples: For each of these activities, explain whether there is a positive or negative externality. 9. Private high school education 10. Smog from an electric power plant 11. Your neighbor's yappy dog 12. Pre-kindergarten measles vaccinations 13. Your dad's blasts his favorite music as you try to study 14. Streetlights 15. Cigarette smoking in a public place