Question

The diagram below can be used to illustrate the effects of both positive and negative externalities associated with a particular good. Price So Private Cost 6 D Do Private Value Quantity 1. (1 pt.) The point that illustrates the market clearing price and quantity of the good in the absence of any externalities is

Answer 1

Due to positive externalities, social benefit curve or demand curve shifts leftward to D2 from D0 representing decline in social price at each quantity or reduces the social cost of producing which shifts the private cost to S2 from S0 reducing price at each quantity.

Due to negative externalities, social benefit curve or demand curve shifts rightward to D1 from D0 representing rise in social price at each quantity or reaises the social cost of producing which shifts the private cost to S1 from S0 raising price at each quantity.

Market will clear at point e where D0 = S0 in the absence of externality.