Authors libby rittenberg 791

benefits. When an activity creates external benefits, its social benefit will
be greater than its private benefit.
The lack of a market transaction means that the person or firm responsible
for the external cost or benefit does not face the full cost or benefit of the
choice involved. We expect markets to produce more than the efficient
quantity of goods or services that generate external costs and less than the
efficient quantity of goods or services that generate external benefits.
Consider the case of firms that produce memory chips for computers. The
production of these chips generates water pollution. The cost of this
pollution is an external cost; the firms that generate it do not face it. These
firms thus face some, but not all, of the costs of their production choices.
We can expect the market price of chips to be lower, and the quantity
produced greater, than the efficient level.
Inoculations against infectious diseases create external benefits. A person
getting a flu shot, for example, receives private benefits; he or she is less
likely to get the flu. But there will be external benefits as well: Other
people will also be less likely to get the flu because the person getting the
shot is less likely to have the flu. Because this latter benefit is external, the
social benefit of flu shots exceeds the private benefit, and the market is
likely to produce less than the efficient quantity of flu shots. Public, private,
and charter schools often require such inoculations in an effort to get
around the problem of external benefits.

Imperfect Competition
In a perfectly competitive market, price equals marginal cost. If
competition is imperfect, however, individual firms face downwardsloping demand curves and will charge prices greater than marginal cost.
Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org

791