Show the impact of the inclusion of external cost on a supply and demand graph.

Show the impact of the inclusion of external cost on a supply and demand graph.

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Expert Solution

Economists commonly describe the demand curve as a measure of the overall benefits of the activity being diagrammed, and the supply curve as a measure of the overall costs of that same activity. But the costs and benefits illustrated by the curves are only those experienced by producers and consumers directly involved in the activity. A negative externality increases the social costs of economic activity, so a diagram that took it into account would have a supply/cost curve farther to the left, reflecting a higher social "price" at every quantity. A positive externality increases the social benefits of economic activity, so an adjusted demand/benefit curve would lie farther left on the diagram, reflecting a lower social price at each quantity.

Rahul Sunny answered 1 year ago

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