Economic Terms

These are simply different labels for demand and supply curves. It is normal to use these labels for analysing externalities.

 

The additional benefit imposed on third parties by the consumption of an extra unit of a good or service. The benefit may be negative or positive.

Below is a diagram to highlight the external benefit that is present in a market with a positive consumption externality. This measures the size of the external benefit that will be realised from third-parties if the amount of goods consumed rises to the socially optimal amount i.e. it is the opposite of a dead weight loss triangle. In this instance the marginal external benefit exists because there is a divergence between the marginal private benefit and the marginal social benefit curves.

 

The additional cost imposed on third parties by producing an extra unit of a good or service. The cost may be negative or positive.

Below is a diagram to highlight the external cost that is present in a market with a negative production externality. This measures the size of the external cost that will be realised from third-parties if the amount of goods produced falls to the socially optimal amount In this instance the marginal external cost exists because there is a divergence between the marginal private cost and the marginal social cost curves. The reason this good is overproduced is because the individual producers do not realise this external cost they are releasing onto society.

The benefit a consumer enjoys by consuming an extra unit of a good or service.

The cost a supplier incurs by producing an extra unit of a good or service.

The increase in output that arises from the application of the last unit of capital stock.

The proportion of an increase in income that households are likely to consume.

The proportion of an increase in income that households are likely to save.

The total benefit enjoyed by consumers and third parties from the consumption of an additional unit of a good or service.

The total cost incurred by suppliers and third parties due to the production of an additional unit of a good or service.