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17 Externalities


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Unformatted text preview: – the cost of producing an additional unit of output or service that falls on people other than just the producer. ► Marginal Cost + Marginal External Cost = Marginal Social Cost. Marginal Social Cost – the marginal cost occurred by the entire society. 6 Negative Externality’s effect on the Competitive Equilibrium Price Marginal Social Cost = Marginal Cost + Marginal External Cost Supply = Marginal Cost Psc* P* Demand = Marginal Benefit Qsc* Q* ► ► ► Quantity When there exists an externality, the marginal cost/supply curve is shifted to reflect the cost of producing to everyone. The market is then not producing at the equilibrium anymore as the equilibrium is now Qsc*, Psc*. Producing at Q*, P* instead of Qsc*, Psc* causes a DWL. Because it does not take into account total social cost. 7 MSC>MB so there is a loss in total surplus. Two Types of Externalities ► Type 2: Positive Externality A positive externality exists when production or consumption activity creates an external benefit. 8 What happens when there is a Positive Externality ► When there is a positive externality, there exists a marginal external benefit. Marginal External Benefit – the benefit of an additional unit that other people (other than those enjoying the output or service) enjoy. ► Marginal Benefit + Marginal External Benefit = Marginal Social Benefit. Marginal Social Benefit – the marginal benefit of consump...
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