Marginal external cost
Definition. Marginal external cost is the additional cost imposed on third parties, who are not part of a transaction, from the production or consumption of one more unit of a good. It is the spillover cost not borne by the producer or consumer responsible for it.
Marginal social cost equals marginal private cost plus marginal external cost. When external costs exist, the free market overproduces relative to the social optimum, generating a deadweight loss and a negative externality.
This term belongs to Externalities in A Level Economics. Read the full chapter for the diagrams, worked examples and exam technique.
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