Unit 6: Market Failure and the Role of Government
6.1: Socially Efficient and Inefficient Market Outcomes
Socially efficient market outcomes are the optimal distribution of all resources in society while taking into account all internal and external costs and benefits. In our study of economics, socially efficient takes place where marginal social benefit (MSB) = marginal social cost (MSC).
Marginal Social Benefit (MSB) is the additional benefit received by all members of society due to the consumption of an additional unit of a good or service. This includes both those who directly benefit from consuming the foods, and those who receive spillover benefits, or external benefits experienced by third parties, from consumption.
Marginal Social Cost (MSC) is the additional cost incurred by all members of society due to the consumption of an additional unit of a good or service. This includes both the private cost paid by the producers along with spillover costs, which are external costs faced by third parties.
When you are producing at the quantity and price level where MSB = MSC, you are producing at the socially efficient point. At this point, we maximize all economic surplus. If you choose a quantity on either side of the equilibrium quantity, you are producing an inefficient quantity, and it will result in deadweight loss.
In the graph above, if we were to produce either at a quantity above or below the equilibrium, we would be producing at an inefficient point where we are either underproducing or overproducing the good or service. The government sometimes has to take action or make policies to correct these inefficiencies.