1
Dept of Economics
Fall 2010
University of Iowa
Professor Sarah Frank
Externalities
Negative Externalities
If the consumption or production of a good has a negative externality, it means there is a cost imposed
on people who are neither the producers nor the consumers of the good. There is a cost that is
external
to the market; it is imposed on people
outside
the market transaction.
Let’s consider the market for pesticides. Consumers who buy pesticides benefit from fewer insects
growing on their plants. However, if children accidentally ingest the pesticide, they are at risk of getting
sick.
To see this graphically, we can draw the usual supply and demand curve for the market. But now, we
give the demand curve a new name. We will call it the Marginal Private Benefit (MPB) curve. This is
because the demand curve tells us the extra benefit received from an extra unit of the good. Moreover,
it is the marginal PRIVATE benefit because it is the marginal benefit the
consumers
receive.
We also rename the supply curve the Marginal Private Cost (MPC) curve. This is because the supply
curve is merely the sum of all the individual firms’ marginal cost curves. But since it is the costs to the
firms, it is a private cost.
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- Fall '10
- stuff
- Supply And Demand, producer, Externality, Marginal private benefit
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