Question

What is the difference between the marginal private cost and the marginal social cost? How is MSC calculated? Does the private sector generally over or under produce goods with a MSC > MC?

Answer 1

Marginal private cost (MPC) is the change in the producer's total cost due to the production of an additional unit of a good or service. It is also known as marginal cost of production

Marginal social cost (MSC) is the change in society's total cost brought about by the production of an additional unit of a good or service. It includes both marginal private cost and marginal external cost. For example, suppose cost of producing an additional unit of a good.is $50. Due to production pollution is emitted which causes $45 worth of damage to the paint on your car. The marginal social cost of production is the producer's cost plus the external cost, or $95.

when msc>mc then private sector generally over produce as can be seen in diagram below