H08Externalities - 29 Externality externality the...

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1 Externality Externality externality the production and use of a good generates side-effects that are not included in the price of the product externalities in production and consumption positive and negative externalities 29 marginal external costs - additional costs incurred by society that firms don’t pay for marginal social cost – costs to firms and others Negative Externality Negative Externality MC Quantity ($) PRIVATE D (MARGINAL BENEFIT) in equilibrium Q D =Q S market supply reflects marginal private costs Q C MC SOCIAL = marginal private costs + marginal external costs 29 Reduction in Social Cost MC SOCIAL MC Quantity ($) PRIVATE D (MARGINAL BENEFIT) Negative Externality Negative Externality too much produced competitive outcome is not efficient efficient level of output - marginal social cost is equal to marginal benefit Q * Reduction in Social Benefit Q C Q 1 29
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2 MC SOCIAL DeadWeight Loss Negative Externality Negative Externality MC Quantity ($) PRIVATE D (MARGINAL BENEFIT) Q C too much produced competitive outcome is not efficient efficient level of output - marginal social cost is equal to marginal benefit Q * market failure (market needed for externality)
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H08Externalities - 29 Externality externality the...

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