Environmental Economics-Part A-Lecture 2-Sub Lecture 2A

            Environmental Economics-Part A-Lecture 2-Sub Lecture 2A-ageconbd.com  

The marginal social cost is recognized as the marginal cost incurred by the entire society - by the producer and by everyone else on whom the cost falls. The Marginal social cost is the sum of marginal private cost and marginal external cost. That means MSC = MC + Marginal external cost.

Marginal private cost, marginal external cost, and marginal social cost expand with output.

Figure-1: Environmental Economics-Part A-Lecture 2-Sub Lecture 2A-Quantity-ageconbd.blogspot.com

The marginal external cost is termed as the vertical distance between the MC and MSC curves in Figure-1.

Figure-2: Environmental Economics-Part A-Lecture 2-Sub Lecture 2A-Equilibrium in an unregulated market with an external cost-ageconbd.blogspot.com

The quantity produced is ensured where marginal private cost equals marginal social benefit. 

                 

At the market equilibrium, MSC is greater than MSB, so the market generates an inefficient quantity. At the efficient quantity, the marginal social cost is equal to marginal benefit. With no regulation, the market overproduces and generates a deadweight loss. 

Figure-3: Environmental Economics-Part A-Lecture 2-Sub Lecture 2A-How the establishment of property rights achieves an efficient outcome-ageconbd.blogspot.com