Question

What is a negative externality? Construct a graph for the market for Steel showing the market price and quantity when the firms are dumping their industrial waste in the local waterways. What is the motivation for firms to pollute the local waterways? Explain how third parties are adversely affected from the pollution and how the negative externality can be internalized. Draw into the graph the appropriate shift of the supply curve which will remedy the negative externality and bring about the socially optimal level of output. What is a positive externality? Construct a graph for the market for vaccine shots showing the market price and quantity. 6 Explain how third parties are benefiting from those who consume vaccine shots and how the positive externality can be internalized. Draw into the graph the appropriate shift of the demand curve which will remedy the positive externality.

Answer 1

Negative externalities:

It is the negative side effect of the consumption and production which are faced by the third parties. The steel firm creates the pollution and effluents that are faced by the third parties.

Following is the diagram: the Q's and P1 are the socially equilibrium quantity and price. While the Q and P are private quantity and price which do not consider the externalities.

Further , here government needs to impose the pigou tax per unit equal to the marginal external cost to reduce the output to socially desirable level.

Positive externalities:

These are the side effects of the consumption and production.

Here marginal social benefits are more than the private marginal benefit.

Following is the diagram:

in the diagram, the SMB is greater than the PMB , thus Q's is socially desirable level of output.

Here goverment must provide the subsidies . It must be equal to the marginal external benefit.