Marginal External Cost (MEC) (Definition)
The marginal external cost (MEC) represents the additional cost imposed on third parties, who are not involved in the transaction, when one more unit of a good is produced or consumed. This cost is a core component of a negative externality. The MEC is combined with the marginal private cost (MPC) to determine the marginal social cost (MSC).
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CORE Econ
Ch.10 Market successes and failures: The societal effects of private decisions - The Economy 2.0 Microeconomics @ CORE Econ
The Economy 2.0 Microeconomics @ CORE Econ
Introduction to Microeconomics Course
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Example of Negative Externality: Bunker Hill Company Lead Poisoning in Idaho
A large-scale pig farming operation is established in a rural area. The farm is profitable, providing jobs and a steady supply of pork to the market. However, the waste from the farm runs off into a nearby river, contaminating the water source for a downstream town. The town must now invest in a costly new water filtration system, and local fishing businesses have collapsed due to the decline in fish populations. The farm does not pay for these downstream costs. In this situation, what is the specific cost that represents the negative consequence for a third party?
Analyzing an Economic Side-Effect
Analyzing an Uncompensated Cost
A chemical factory produces and sells industrial solvents. The manufacturing process releases airborne pollutants that cause health issues for people living in a nearby town. The town's residents face increased medical bills, but the factory does not cover these costs. Match each element of this scenario to its correct economic description.
Identifying Compensated Costs
A car manufacturer discovers a defect in its vehicles that increases fuel consumption for its customers. The company issues a recall and fully compensates all affected car owners for the extra fuel costs they incurred. This situation is an example of a negative externality.
Evaluating Solutions to Urban Congestion
When the production or consumption of a good imposes an uncompensated cost on a third party, such as pollution from a factory affecting nearby residents, this market failure is known as a(n) ________.
A factory that produces widgets also releases pollutants into the air as a byproduct. This pollution imposes health costs on the nearby community. Arrange the following statements to illustrate the logical sequence of events that describes this negative externality and its effect on the market.
An individual's action creates a cost for someone else. In which of the following scenarios is this cost most accurately described as a negative externality?
Marginal External Cost (MEC) (Definition)
Negative Consumption Externality
Solutions to Negative Externalities
Negative Production Externality
Negative Consumption Externalities
Royal Dutch Shell Oil Spills as a Negative Externality
Definition of Social Cost
Learn After
A chemical plant produces industrial solvents. For each gallon of solvent produced, the plant incurs $10 in costs for labor and raw materials. The production process also releases waste into a nearby lake, which reduces the local fish population and costs the local tourism industry an estimated $4 in lost revenue for each gallon produced. What is the cost imposed on others from the production of one additional gallon of solvent?
Analyzing Costs of an Externality
Identifying External Costs in Production
A power plant emits pollutants that cause an estimated $500,000 in health and environmental damages to the surrounding community each year. Based on this information, the cost imposed on others by the production of one additional megawatt-hour of electricity is $500,000.
A factory's production process creates noise pollution that affects the local community. Match each type of cost associated with producing one more unit with its correct description.
Understanding Marginal External Cost
The cost imposed on parties not directly involved in a transaction when one more unit of a good is produced is known as the __________.
A paper mill situated on a river produces 1,000 tons of paper per month. This level of production creates water pollution that results in a total of $50,000 in damages per month to a downstream commercial fishery. If the mill were to produce one additional ton of paper, the estimated additional damage to the fishery would be $60. The cost for the mill itself to produce one more ton of paper is $200.
Which of the following values represents the cost imposed on others by the production of one additional ton of paper?
Calculating Marginal Damage from Production
Example of Marginal External Cost
Explaining an External Cost from Congestion
Marginal Social Cost (MSC) (Definition and Formula)
Marginal Social Cost (MSC) as the Sum of MPC and MEC