The socially efficient quantity is where the marginal social benefit(Msb) is equal to the marginal social cost(Msc). The Msb is how much society benefits from a product or service and the Msc is the cost it will take to achieve it. For example, people may be willing to donate 10$ to charity but not 1000$. This is because the Msc of donating 1000$ is higher than its benefit. 

Externalities are costs to people who did not do the transaction of the good. For example, when a person purchases and smokes a cigar, it will go on to negatively impact other people. Cigarette butts are litter, the smoke causes pollution and the stench can annoy others. This is called a negative externality. 

An example of a positive externality is how higher education can lower crime rates and benefit tax revenue. Due to all of these hidden benefits, the marginal social benefit is higher than the marginal social cost. These benefits are hidden so positive externalities are often underproduced as shown in this graph. To mitigate this loss, the government often provides a per-unit subsidy or a lump-sum subsidy to promote positive externalities. These subsidies are paid to consumers or producers in hopes that they will produce more with the increased profit. 

The government can often try to prevent negative externalities, when the Msc is higher than the Msb, by imposing a per-unit tax or lump sum tax on producers or consumers. The per-unit tax will be equal to the marginal external cost(Mec) which is the external cost of producing another unit of the product. This will lower the production and move closer to the socially optimal point. 

The Coase theorem states that private parties can solve the externality costs of producing by giving those who are harmed related benefits. For example, an airplane company can give out soundproof glass for neighbouring houses. 

A public good is non-exclusive nonrival. This means that everyone has access to public goods no matter if they pay taxes or not. Examples include parks and streetlights. Public goods also have to be non-rival meaning that just because one person uses it does not impact the ability of another person to use it. For example, one person looking at scenery does not impact how well other people can also look at scenery. 

A private good is one that is exclusive and rival. Not everyone has access to this type of good and not everyone can use it. Examples include a ticket to a basketball game or an airplane ride. 

The free-rider problem states that the free market will not produce any public goods because there's no profit. That is why it is necessary for the government to tax and provide those necessary public goods. 

To show the distribution of income economists often use a graph with a perfect income distribution line and a Lorenz curve. The equality line shows what it would be like if everyone had the same income and the Lorenz curve shows what the distribution of income truly is. For example, looking at point A on the perfect equality line, one can recognize that 50% of the population gets 50% of the income. Point B on the Lorenz curve on the other hand shows that 50% of the population only gets 20% of the income. 

The Gini coefficient is a number ranging from 0-1 that represents how wealth is distributed. 0 would represent equality and the perfect equality line whereas 1 would represent all the money going to one place. 

Gini coefficient= A divided by (A+B)