Externality – Action by either a producer or a consumer which affects other producers or consumers, but is not accounted for in the market price.
Marginal external cost – Increase in cost imposed externally as one or more firms increase output by one unit.
Marginal social cost – Sum of the marginal cost of production and the marginal external cost.
MSC = MC + MEC
Marginal external benefit – Increased benefit that accrues to other parties as a firm increases output by one unit.
Marginal social benefit – Sum of the marginal private benefit plus the marginal external benefit.
MSB = D + MEB