Externalities

• Marginal private cost is the cost to the individual firm of producing an additional unit of output.
• Marginal private benefit is the benefit to the individual consumer from consuming an additional unit of a good.
• Marginal social costs include all marginal private costs and external costs imposed on third parties.
• Marginal social benefits include all marginal private benefits and external benefits received by third parties.
• The supply curve represents the marginal private cost, while the demand curve represents the marginal private benefit.
• In the absence of externalities, the market equilibrium provides an efficient allocation of resources.
• Negative production externalities cause the marginal social cost to be greater than the marginal private cost, leading to overproduction and market failure.
• Negative consumption externalities cause the marginal social benefit to be lower than the marginal private benefit, leading to overconsumption and market failure.
• Positive consumption externalities cause the marginal social benefit to be higher than the marginal private benefit, leading to underconsumption and market failure.
• Positive externalities in consumption and production lead to market failures, resulting in underconsumption and underproduction, causing allocative inefficiency and welfare loss.

This video discusses the concept of externalities and how they affect marginal costs and benefits. It explains that marginal private costs and benefits refer to the impact of adding one additional unit to the current situation for an individual or firm. Marginal social costs and benefits, on the other hand, include the external costs or benefits imposed on third parties. In a market without externalities, the private costs and benefits are the same as the social costs and benefits, resulting in an efficient allocation of resources. However, when externalities exist, such as negative production or consumption externalities, the market equilibrium leads to overproduction or overconsumption, causing allocative inefficiency and welfare loss. Conversely, positive externalities in consumption can lead to underconsumption. The socially optimal outcome occurs when the marginal social cost equals the marginal social benefit.