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Mathematically, social marginal cost is the sum of private marginal cost and the external costs. [3] For example, when selling a glass of lemonade at a lemonade stand, the private costs involved in this transaction are the costs of the lemons and the sugar and the water that are ingredients to the lemonade, the opportunity cost of the labor to combine them into lemonade, as well as any ...
When the marginal social interest diverges from the marginal private interest, the industrialist has no incentive to internalize the marginal social cost. Conversely, Pigou argues, if an industry produces a marginal social benefit, the individuals receiving the benefit have no incentive to pay for that service.
Of great importance in the theory of marginal cost is the distinction between the marginal private and social costs. The marginal private cost shows the cost borne by the firm in question. It is the marginal private cost that is used by business decision makers in their profit maximization behavior.
The social discount rate can appear in both calculations either as future costs such as maintenance or as future benefits such as reduced pollution emissions. Calculating the true social marginal cost can be a lot easier than measuring the social marginal benefit.
A social optimum occurs when the nominal rate is zero (or deflation is at a rate equal to the real interest rate), so that the marginal social benefit and marginal social cost of holding money are equalized at zero. Thus, the Friedman rule is designed to remove an inefficiency, and by doing so, raise the mean of output.
The marginal private cost is less than the marginal social or public cost by the amount of the external cost, i.e., the cost of air pollution and water pollution. This is represented by the vertical distance between the two supply curves. It is assumed that there are no external benefits, so that social benefit equals individual benefit.
The applications of the marginal cost of public funds include the Samuelson condition for the optimal provision of public goods and the optimal corrective taxation of externalities in public economic theory, the determination of tax-smoothing policy rules in normative public debt analysis and social cost-benefit analysis common in practical ...
In the Lindahl Model, Dt represents the aggregate marginal benefit curve, which is the sum of Da and Db---the marginal benefits for the two individuals in the economy. In a Lindahl equilibrium, the optimal quantity of the public good will be where the social marginal benefit intersects the marginal cost (point P).