Question

An externality arises when a firm or person engages in an activity that affects the well-being of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is adverse, it is called a 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 equilibrium 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 private value, then you should shift the demand curve to reflect the social value of consuming the good Supply Demand Supply 2 emand QUANTITY (Units) Session Timeout 59:

Answer 1

The impact on the third party is adverse it is called a negative externality In the presence of negative externality social cost in higher than private cost therefore supply curve shift to left as shown below leading to higher price and lower quantity in the absence of government intervention the market equilibrium quantity produced will be greater than the socially optimal quantity example of negative externality your roommate nick her bought a bird that keeps you up at night with its chipping the city where you live this turned the publicly owned land next to your house into a park causing park trash dropped by park vision to pile up in your backyard