As usual, we will express some of these ideas with diagrams. Starting from an industry marginal cost (supply) diagram, we will change the diagram to reflect the difference between private and social cost. As usual we have the quantity of output on the horizontal axis. In this case the quantity of output is measured in tons of fish caught. On the vertical axis we have the marginal cost per ton of fish caught. Here is the picture.
In the diagram, the difference between MPC and MSC is the market value of fish that might be caught in the future (discounted to present value) if one less fish were taken this year. This opportunity cost is the marginal external cost of fish caught and therefore the difference between the marginal private cost and the marginal social cost.
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