anptsAverage 1 Externalities Definition and examples An exte

anptsAverage: 1. Externalities- Definition and examples An externality artses when a firm or person engages in an activity that affects the wellbeing of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is beneficial, it is called a positive externality. The following graph shows the demand and supply curves for a good with this type of externality. The dashed drop lines on the graph reflect the market equilbrium price and quantity for this good. Shift one or both of the curves to reflect the presence of the externality. If the social cost of producing the good is not equal to the private cost, then you should shift the supply curve to reflect the social costs of producing the good; similarly, if the social value of producing the good is not equal to the demand curve to reflect the social value of consuming the good.

Solution

Less

MCQ ans is A and B.

Without government intervention, market will result where private value intersect supply curve

Whereas socially optimum output is where social value=supply.

Thus market outcome is less than the socially efficient outcome.