A Level explanation — production externality

A production externality occurs when production creates costs (or benefits) for third parties not reflected in the market price. MPC is the marginal cost to the producer; MSC includes external costs to society.

Why MPB = MSB? This diagram assumes no consumption externality — the benefit to the consumer is the same as the benefit to society, so the marginal private benefit and marginal social benefit curves overlap.

Q₁ is the market output (where MPC = MPB). Q_solo is the socially optimum level of output — where MSC = MSB (all costs and benefits to society are included). When there is no externality, MPC = MSC and Q₁ = Q_solo.

Negative (pollution, congestion): MSC > MPC → Q₁ > Q_solo (overproduction) → welfare loss. Positive (R&D spillovers, training): MSC < MPC → Q₁ < Q_solo (underproduction) → welfare gain.

Move the slider to switch negative → none → positive. The page title updates automatically.