Efficiency, externalities and public goods

Learning objectives

Define the socially efficient quantity as the output where marginal social benefit equals marginal social cost, and explain why producing more or less creates deadweight loss

Distinguish marginal private benefit and cost from marginal social benefit and cost, and define positive and negative externalities in production and consumption

Draw diagrams showing a negative externality (over-production) and a positive externality (under-production) and identify the deadweight loss in each

Analyze how a per-unit tax equal to the marginal external cost, a per-unit subsidy equal to the marginal external benefit, or regulation can move output to the socially optimal level

Classify goods by rivalry and excludability, explain the free-rider problem and why the market under-provides public goods, and explain why governments provide them