Question

Draw a Marginal Demand curve of a pollution damage that can be noticeable only from a certain level and could increase exponentially.

Answer 1

pollution is a negetive externality that occur on demand side and negetive exerternality is a cost that occur to a bystander. for instance a factory may pollute the air in its town. the company running the factory may not have to pay its cost nor the consumer that buys the factory's product. howeever the people living in the town are the bystanders that pays the cost of the pollution externally produced by the factory.

demand is also called marginal benefit

supplu is also called marginal cost

in the figure 1st supply curve represent that the producer is providing some goods according to their private marginal cost but their is a gap between that and what society pays for the production of that good.in case of pollution, the deadweight loss takes the form of medical cost for nearly population, contaiminated drinking water, harming crop production, that is absorbed by the society. with the difference between what the producer pays and what the overall society pays + what the producer pays is called MARGINAL DAMAGE. MARGINAL DAMAGE is the difference betwween supply curve 1 and supply curve 2 as shown in figure.

NEGETIVE PRODUCTION EXTERNALITIES: private marginal cost are lower than the social marginal cost. the supply curve is lower than it should be.

NEGETIVE CONSUMPTION EXTERNALITIES: PRIVATE MARGINAL BENEFITS ARE HIGHER THAN SOCIAL MARGINAL BENEFITS. THE DEMAND CURVE IS HIGHER THAN IT SHOULD BE.

IN THE FIGURE IT IS CLEAR THAT POLLUTION INCREASES OVERALL COST AND DISTORT THE SUPPLY AND DEMAND CURVE AND THE MARKET PAYS AN ARTIFICIALLY HIGH OR LOWER PRICE.