Externalities: Any external factor which causes either a benefit or loss to the producers and these benefits or losses do not get reflected in the market price of a good or service and not even reflected in the accounts of a producer, then this is known as externalities. It may be a loss for one party and gain for the other. The positive externality can be said as an external benefit, whereas the negative externality can be said as an external cost Pigouvian tax: This tax is laid on the market activity which indulges in generating the negative externality, it is generally set equal to the social cost that the negative externality generates, and it is laid to correct the inefficient outcome of the market. Marginal social cost: The increased cost for the society by any of the activity of an individual or firm is known as marginal social cost, it is calculated by summing up marginal external cost and marginal private cost. Marginal social benefit: The increased benefit for the society by any of the activity of an individual or firm is known as marginal social benefit, it is calculated by summing up marginal external benefit and marginal private benefit.

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Chapter 10, Problem 3P

To determine

Concept Introduction:

Externalities: Any external factor which causes either a benefit or loss to the producers and these benefits or losses do not get reflected in the market price of a good or service and not even reflected in the accounts of a producer, then this is known as externalities. It may be a loss for one party and gain for the other.

The positive externality can be said as an external benefit, whereas the negative externality can be said as an external cost

Pigouvian tax: This tax is laid on the market activity which indulges in generating the negative externality, it is generally set equal to the social cost that the negative externality generates, and it is laid to correct the inefficient outcome of the market.

Marginal social cost: The increased cost for the society by any of the activity of an individual or firm is known as marginal social cost, it is calculated by summing up marginal external cost and marginal private cost.

Marginal social benefit: The increased benefit for the society by any of the activity of an individual or firm is known as marginal social benefit, it is calculated by summing up marginal external benefit and marginal private benefit.

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