Given a scenario, explain, both verbally and graphically, how the allocation of resources is impacted by...

Given a scenario, explain, both verbally and graphically, how the allocation of resources is impacted by external costs (negative externalities).

Expert Solution

Resource allocation are affected by externalities market fails to take price that generated by external effect of some economic activity. Thus price mechanism fails to show the real cost of the activity and doesn't include social cost caused by that economic activity so private cost may diverge from social cost.

As shown in diagram when external cost doesn't take into account free market allocation shows the price P and quantity Q and equilibrium point at A and this is allocatively inefficient it is not able to fully price. So there is a gap between allocatively efficient quantity Q' and price P' from allocatively inefficient quantity Q and price P because of external cost caused by economic activity.

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Rahul Sunny answered 1 year ago

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Given a scenario, explain, both verbally and graphically, how the allocation of resources is impacted by...

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