Question

What would be the impact of negative externalities on conumer surplus? Producer surplus?

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Answer 1

The externalities can be classified as negative and positive. The positive externality will not create any huge problems in the economy and the production unit. The negative effects can arise on third party during the production process. The negative externalities include the pollution, consumption of public goods, imperfect information etc. This type of externalities will affect both consumer surplus and producer surplus. The increasing level of pollution will affect the consumption pattern of the consumers. Let us consider one example about the passive smoking; the consumption of cigarettes among the consumers will affect the consumption level of the people. The cigarettes consumption will affect the health of the people. The unhealthy worker cannot do their works at proper time. The negative externality in the production sector will increase the social cost of production. For example, the non-organic farming will increase the revenue, but it will increase the pollution and health issues of the consumers.
The smoking behaviour example of the consumer is the best example to show the negative externality of the consumer surplus. This kind of unhealthy people cannot do their consumption and production in a smooth way. Thus the negative externality will affect both the consumer surplus and producer surplus.