With this type of externality, in the absence of government intervention, the market equilibrium quantity produced will be less than the socially optimal quantity.
Which of the following generates the type of externality previously described? Check all that apply.
Kyoko has planted hundreds of flowers in her front yard, beautifying the neighborhood both for herself and for her neighbors.
A leading software company has decided to increase its research budget for inventing new open-source technologies.
The local airport has doubled the number of runways, causing additional noise pollution for the surrounding residents.
Your roommate Musashi has bought a bird that keeps you up at night with its chirping.
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 an 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.
Adjust 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 drag 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 drag the demand curve to reflect the social value of consuming the good.
Demand
PRICE (Dollars per unit)
Supply
Demand
QUANTITY (Units)