An externality exist what’s the internal cost is greater than the social cost or when the...
An externality exist what’s the internal cost is greater than
the social cost or when the internal benefits are greater than the
external benefits.
Whereas social optimum is when the internal cost is less than to
equal to the social cost or when the social value is greater than
or equal to the internal/private cost.
Is this correct? If not or if there is a better way to explain it please do so. Thank you!
Homework Answers
An externality exists when
- Marginal social benefit is greater than marginal private benefit. this implies that there is a marginal external benefit besides the marginal private benefit which is not internalized under marginal private benefit.
- Marginal social cost is greater than marginal private cost. this implies that there is a marginal external cost which is not internalized under marginal private cost.
In first case, there is a positive externality and in the second case there is a negative externality.
Social optimum exist when
- Marginal external cost is internalized and is now a part of marginal private cost so that marginal private cost and marginal social cost both are equal.
- marginal external benefit is internalized and is now a part of marginal private benefit so that marginal private benefit and marginal social benefit both are equal.
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An externality exist what’s the internal cost is greater than
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