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 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: http://www.saylor.org/books/ Saylor.org 791