Quick Reference Card
Click the formula card to expand/collapse. Use this as a cheat sheet while studying.
Key Formulas & Relationships (click to toggle)
Neg. Ext: \(MSC = MPC + MEC\)
Pos. Ext: \(MSB = MPB + MEB\)
Efficiency: \(MSC = MSB\)
No Ext Cost: \(MSC = MPC\)
No Ext Benefit: \(MSB = MPB\)
Market Eq: \(MPB = MPC\) (D = S)
Corrective Tax: \(Tax = MEC\)
Corrective Subsidy: \(Subsidy = MEB\)
Net Social Benefit: \(NSB = TSB - TSC\)
DWL Triangle: \(\frac{1}{2} \times base \times height\)
TSB: \(\sum MSB\) (cumulative)
TSC: \(\sum MSC\) (cumulative)
Why MSC = MSB for efficiency? Because at this point, the total benefit to ALL of society (including 3rd parties) from one more unit exactly equals the total cost to ALL of society. Producing more would cost society more than it benefits; producing less would miss beneficial trades.
Decision Framework
| Situation | Market Result | Problem | Policy | Effect on Q |
|---|---|---|---|---|
| Negative Externality | MPB = MPC (ignores MEC) | Overproduction | Corrective Tax = MEC | Q decreases to efficient |
| Positive Externality | MPB = MPC (ignores MEB) | Underproduction | Corrective Subsidy = MEB | Q increases to efficient |
| No Externality | MPB = MPC = MSB = MSC | None - efficient | None needed | Already optimal |
| Distortion Subsidy | Already efficient | Creates inefficiency | Remove subsidy | Q artificially increased |
Key Terminology
| Abbreviation | Full Name | Meaning |
|---|---|---|
| MPC | Marginal Private Cost | Cost borne by the producer for one more unit |
| MEC | Marginal External Cost | Cost imposed on 3rd parties per unit (e.g., pollution) |
| MSC | Marginal Social Cost | Total cost to society = MPC + MEC |
| MPB | Marginal Private Benefit | Benefit received by the consumer for one more unit |
| MEB | Marginal External Benefit | Benefit to 3rd parties per unit (e.g., herd immunity) |
| MSB | Marginal Social Benefit | Total benefit to society = MPB + MEB |
| DWL | Deadweight Loss | Efficiency loss from producing wrong quantity |
| NSB | Net Social Benefit | TSB - TSC, maximized at efficient point |