Attempts: Average: 14 2. Externalities - Definition and examples An externality
ID: 1120567 • Letter: A
Question
Attempts: Average: 14 2. Externalities - Definition and examples An externality arises when a firm or person engages in an activity that affects the well-being of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is adverse, it is called ane ative externa it. The following graph shows the demand and supply curves for a good with this type of externality. The dashed drop lines on the graph reflect the market equilibrium price and quantity for this good. Shift one or both of the curves to reflect the presence of the externality. If the social cost of producing the good is not equal to the private cost, then you should shift the supply curve to reflect the social costs of producing the good; similarly, if the social value of producing the good is not equal to the private value, then you should shift the demand curve to reflect the social value of consuming the goodExplanation / Answer
1) Negative Externality
2) Shift in the demand and supply curve
a) The supply curve will shift to the Left.
Since the social cost is not equal to the private cost which mean producing the product is harmful and hence the supply curve is shifted to left to reduce the optimal quantity.
b) The demand curve will shift to the right.
In order to reflect the social value the demand curve will be shifted to the right and which is the optimal of the good to be produced.
3) In the abence of government intervention ,the market equilibrium quantity will be greater than the socially optimal quantity.
4) The following shall apply
c) The city where you live has turned the publicily owned land next to your house into a park, causing trash dropped by park visitors to pile up in your backyard
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