2. Externalities-Definition and examples An externality arises when a firm or pe

Question

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 beneficial, it is called a externality 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 refiect 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 refiect the social value of consuming the good Demand Supply QUANTITY (Urits)

Explanation / Answer

Third party gets beneficial then it is called positive externality

Shift the demand curve upward or rightward.

With this type of externality, market equilibrium quantity produced will be less than socially optimal quantity.

Ans is C and D

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.