In: Economics
Below is the graph where there is a negative externality because MSC > MPC
At the market equilibrium the quantity is Q1 and price is P1
At the socially optimal level quantity is Q2 and price is P2
This shows that when the externality (difference between MSC and MPC) is internalized, output is decreased and price is reduced (in case of negative externality)
Here a tax is imposed on producers which shifts the MPC up to MSC to include the external cost.