Question

Score: 7 of 8 pts x Question 7: Externalities and Economic Efficiency 21 Question Consider the market illustrated in the figure to the right Supply Curve S, represents the private cost of production and demand curve Dy represents the private benefit from consumption Suppose production of this good creates a negative externality Show how the externality affects the market 1) Use the line drawing tool to draw either a new supply (52) or demand (D) curve incorporating the negative externality in production Properly label this line 2) Use the point drawing tool to indicate the market equilibrium price and quantity Label this point Market equilibrium 3.) Use the point drawing tool to indicate the efficient equilibrium price and quantity Label this point Eicient equilibrium Carefully follow the instructions above and only draw the required objects

Answer 1

A negative externality in production shifts the supply curve to the left as shown below :

Price efficient 29ubriven i- market equilibrium Quantity

A higher than efficient quantity will be produced in the market as shown in the above figure.