| Chapter 7 Outline |
| II. THE ECONOMISTS PERSPECTIVE |
| A. Marginal Cost |
| 1. Marginal external cost is the cost of producing an additional unit of a
commodity that is not paid by those producing or consuming the commodity. |
| 2. Marginal private cost is the cost of producing an additional unit of a commodity that is paid by those producing the commodity. The marginal private cost curve is the firm's supply curve. |
| 3. Marginal social cost is the cost of producing an additional unit of a commodity that is paid by society. Marginal social cost includes both marginal external and marginal private cost. |
| B. Marginal Benefit |
| 1. The demand curve represents marginal benefit. The vertical distance at each quantity shows the mount consumers are willing to pay for that unit. Willingness to pay reflects the benefit derived from each unit. |
| 2. If consumers are the only group deriving benefit from a commodity, then the demand curve is the marginal social benefit curve. Marginal social benefit is the benefit society receives when an additional unit of a commodity is produced. |
| C. Competitive Markets and Efficiency |
| 1. A competitive market will produce at the point where quantity demanded and quantity supplied are equal, or where marginal private benefit equals marginal private cost. |
| a. If an external cost exist, a competitive market will produce an inefficient mount of the good. At the point where quantity demanded and quantity supplied are equal, marginal social cost exceeds marginal social benefit and too much of the good is produced. Since marginal social cost exceeds marginal social benefit, a net social loss is generated. |
| b. In order to produce the efficient mount output should be reduced until
marginal social cost and marginal social benefit are equal. |
| c. At the efficient level of output there will usually be some pollution present. |