there is not enough to go around so we have to figure out some way to ration our scarce resources. In the free market system we use the price system as our rationing device. Scarcity depends on both demand and supply
costs you cannot change by making a new decision. You are stuck with these costs regardless of what you do now.
what you sacrifice when you make a decision. You can only count the value of your next best opportunity. This can include actual dollars paid as well as costs that are not dollar‐valued.
How do you make a rational decision?
* Private Expected MB vs. Private Expected MC A rational decision may turn out to be bad if you had bad information to base your decision on, but it is rational if you make the best decision you could based on the information you had at the time.
How do you make a good decision?
* Private Actual MB vs. Private Actual MC You have to do an after‐the‐fact cost‐benefit analysis. In other words, once you have access to all the accurate information (which is usually not until after you already made your decision)
when your consumption or production decision impacts those around you and you ignore these costs/benefits when making your decision.