an unintended side effect that result from production or consumption of a good, affecting the third parties
MSB = MSC
marginal social benefit
marginal social cost
marginal private cost
marginal private benefit
negative externality of production
harmful side effect to the society due to the production by a firm
negative externality of consumption
a harmful side effect to the society due to the consumption by an individual
internalise an externality
a government action to achieve socially desirable equilibrium for the economy
how to internalise external cost for MPC?
per-unit tax (e.g. carbon tax) legislature regulation (tradeable permits - aka cap and trade)
rights to sell and buy actual or potential pollution in artificially created markets
how to internalise external cost for MPB?
public service campaign tax complements subsidise substitutes
where is true efficiency?
MSC = MSB not MPB = MPC
positive externality of production
beneficial side effect to the society due to the production by a firm
postive externality of consumption
beneficial side effect to the society due to the consumption by an individual
how to encourage positive externalities?
subsidies government provisions advertising
person who gains spillover benefit from positive externality