1.3.2 - Externalities Flashcards
(2 cards)
1
Q
Draw a negative externality diagram in overproduction.
A
supply curve = cost to society and private firms.
demand curve = benefits to society and to private firms.
The negative externality is caused by the marginal social cost being higher than the marginal private cost. As private firms act in their own self-interest (profits), they will produce at the private optimum level (b/FM), resulting in price P1 and quantity Q1.
2
Q
Draw a positive externality diagram in underconsumption.
A
