Marginal Cost/Benefit

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Market (Private) Costs

costs recognized by market participants

Marginal Benefit

The amount of satisfaction received from consuming the last unit of a good or service

Marginal Cost

The cost to buy or produce one more unit of a good or service. Includes vale of alternatives given up to produce that unit (opportunity cost) Marginal Cost= Direct Costs (out of pocket) + Indirect Costs (opportunity cost)

Marginal Social Cost (MSC)

Cost of what is and isn't perceived by the market. Market costs + external costs= social costs

Decision Rule

If MSB > MSC, Do it!

External Costs

Costs occurred not recognized by market participants

Marginal Social Benefit (MSB)

Market benefit + external benefit= social benefit Last event/decision creates MSB


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