Chapter 10 Homework
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1. Externalities - Definition and examples
An externality arises when a firm or person engages in an activity that affects the wellbeing of a third party, yet neither pays nor receives any
compensation for that effect. If the impact on the third party is beneficial, 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.
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.
PRICE (Dollars per unit)
Supply
Demand
Demand
Supply
