![]() Note: Since Q2>Q1, we have an underproduction, thus a deadweight loss. Therefore, the intersection between the MSB and MSC is the socially optimal output. Taking the external benefit into account, we graph the MSB curve. However, they are externality benefit not covered. The market equilibrium would be the intersection of those two curves. Suppose we have the demand curve (MPB) and the MSC curve. Marginal Social Benefit: A curve that takes all the benefits into account. Marginal Private Benefit: The demand curve which does not take external benefit into account. Now lets investigate positive externality. Note: Since Q1 > Q2, we have an overproduction, thus a deadweight loss. Therefore, the intersection between the MSC and Demand curve is the socially optimal output. ![]() Taking those into account, we graph the MSC curve. However, they are externality costs not covered by the firms, and incurred by others. ![]() Suppose we have the demand curve and the private MC curve. Marginal Social Cost (MSC) : cost incurred by the entire society from a one-unit increase in production. As an example of a Negative Externality: Suppose a banana farmer uses pesticides on their crop and some of this pesticide runs off into a nearby stream that is the primary water supply of a downstream community. Social Cost of Production : Total cost to society resulting from productions made by individuals and firms. Marginal External Cost : Additional external cost gained from a one-unit increase in production of a good or service. All three are actually examples of economic transactions. Marginal Private Cost (MC) : Additional private cost gained from a one-unit increase in production of a good or service.Įxternal Cost of Production : a cost that is not incurred by the producer but incurred by other people. What do pollution, education, and your neighbors dog have in common No, thats not a trick question. Private Cost of Production: cost incurred by the producer of a good or service. Now lets investigate negative externality. ![]() Positive Consumption Externalities: Maintaining an attractive house can increase the market price for houses around your neighbourhood.Negative Consumption Externalities: Smoking cigarettes pollutes the air around you and imposes a health risk to others.The positive externality would be the pollination from surrounding crops by the bees. Positive Production Externalities: Beekeepers keeping bees for their honey.Negative Production Externalities: Clearing forests destroys habitat of wildlife and adds more carbon dioxide to the atmosphere.Positive externality: this creates a benefitĮxternalities are also known as spill overs onto third parties.Negative externality: this creates a cost.Externality: A cost or benefit from a production that affects the well-being of another person, but is not compensating or being compensated for what the production did. ![]()
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