Externality

The defining factor of an externality is that the actions of one consumer or producer affect other
consumers’ or producers’ costs or benefits in a way not fully reflected by market prices

Public Good

A public good benefits all consumers, even though individual consumers may not pay for the cots of
its provision. It has two features:
-consumption of the good by one person does not reduce the amount that another can consume (the
marginal cost of serving an additional viewer is zero)
-a consumer cannot be excluded from access to the good

E.g., national defense, public radio etc.

We care about this because in a market where there are externalities or public goods, the invisible
hand may not guide the market to an economically efficient allocation of resources. When the
market includes externalities or public goods, the market price may not reflect the social value of the
good, and the market may therefore not maximize totals surplus, meaning that the equilibrium may
be economically inefficient. Therefore, it is considered as sources of market failure.

Social Cost

Social cost includes both private costs and external costs.