Explore Economics

Could you please explain the meaning of externalities in relation to marginal social cost, marginal social benefit?

Externalities are third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid. Externalities occur outside of the market i.e. they affect people not directly involved in the production and/or consumption of a good or service. They are also known as spill-over effects.

Negative externalities

Negative externalities occur when production and/or consumption impose external costs on third parties outside of the market. When negative production externalities exist, social costs exceed private cost. This leads to an over-production of the product if producers do not take into account the externalities.

Marginal social cost = marginal private cost + marginal external cost

From a social welfare viewpoint, we want less output from activities that create an “economic-bad” such as pollution and other types of environmental damage.

There is a revision presentation on negative externalities here

Positive externalities

Positive externalities are the external benefits from production and/or consumption

Marginal social benefit – marginal private benefit + marginal external benefit

Where positive externalities exist, the good or service may be under consumed or under provided since the free market may fail to value them correctly or take them into account when pricing the product.

There is a revision presentation on positive externalities here

Here is a link to our revision notes on market failure

CPD courses

Teaching Behavioural Economics at A Level

This new course supports colleagues delivering the behavioural economics teaching content for the new AQA A Level Economics specification from September 2015.

Learn more ›

Teaching & learning products

OCR Economics Year 1 (AS) Teacher PowerPoint Presentations

This resource comprises a complete collection of editable PowerPoint presentations that are ideal for teaching individual topics for the whole Year 1 (AS) teaching content. Each presentation has a consistent, clear and professional format and maps precisely to the OCR specification teaching content.


OCR GCSE Economics Unit 593 Toolkit 2016

Revision support for the pre-released stimulus material for OCR GCSE Economics Unit 593 in 2016