Externalities

Externality: an effect whereby those not directly involved in taking a decision are affected by the actions of others.

Positive externality: exists when an individual or firm making a decision does not receive the full benefit of the decision.
http://economics.fundamentalfinance.com/positive-externality.php

Negative externality: occurs when an individual or firm making a decision does not have to pay the full cost of the decision.
http://economics.fundamentalfinance.com/negative-externality.php






Social cost= Private + External cost
MSC(Marginal Social Cost)= MPC(Marginal Private Cost)+ MEC(Marginal External Cost)
MSC=MPB(Marginal Private Benefit)= Social Optimum

External Benefit= good for you
External Cost= bad for you

Market failure

In economics, a market failure exists when the production or use of goods and services by the market is not efficient.

Productive Efficiency- where production takes place using the least amount of scarce resources.

Economic Efficiency- where both allocative and productive efficiency are achieved.

Inefficiency- any situation where economic efficiency is not achieved.

Free market mechanism -the system by which the market forces of demand and supply determine prices and the dicisions made by consumers and firms.

Information Failure- a lack of information resulting in consumers and producers making decisions that do not maximise welfare.