4. 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 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 refilect 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 Demand QUANTITY (Units) PRICE (Dollars per unit)

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i am having trouble with this question macroeconmics chapter 5 question 4

### Understanding Externalities in Economics

#### Question:

With this type of externality, in the absence of government intervention, the market equilibrium quantity produced will be _______ than the socially optimal quantity.

#### Multiple Choice:

Which of the following generate the type of externality previously described? *Check all that apply.*

- [ ] A microbiology lab has published its breakthrough in swine flu research.
- [ ] Yakov has planted several trees in his backyard that increase the beauty of the neighborhood, especially during the fall foliage season.
- [ ] The city where you live has turned the publicly owned land next to your house into a park, causing trash dropped by park visitors to pile up in your backyard.
- [ ] Your roommate Charles has bought a bird that keeps you up at night with its chirping.
Transcribed Image Text:### Understanding Externalities in Economics #### Question: With this type of externality, in the absence of government intervention, the market equilibrium quantity produced will be _______ than the socially optimal quantity. #### Multiple Choice: Which of the following generate the type of externality previously described? *Check all that apply.* - [ ] A microbiology lab has published its breakthrough in swine flu research. - [ ] Yakov has planted several trees in his backyard that increase the beauty of the neighborhood, especially during the fall foliage season. - [ ] The city where you live has turned the publicly owned land next to your house into a park, causing trash dropped by park visitors to pile up in your backyard. - [ ] Your roommate Charles has bought a bird that keeps you up at night with its chirping.
**4. Externalities - Definition and Examples**

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 negative 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.

**Graph Explanation:**
The provided graph has the following components:
1. **Axes:**
   - The vertical axis represents the "PRICE" (Dollars per unit).
   - The horizontal axis represents the "QUANTITY" (Units).

2. **Curves:**
   - The upward-sloping orange line represents the "Supply" curve.
   - The downward-sloping blue line represents the "Demand" curve.

3. **Equilibrium:**
   - The point where the Supply and Demand curves intersect is the market equilibrium. This point determines the equilibrium price and quantity of the good in the market.

4. **Dashed Lines:**
   - Vertical and horizontal dashed lines extend from the equilibrium point to the respective axes, indicating the equilibrium quantity on the quantity axis and the equilibrium price on the price axis.

**Instruction to the Reader:**

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.
Transcribed Image Text:**4. Externalities - Definition and Examples** 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 negative 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. **Graph Explanation:** The provided graph has the following components: 1. **Axes:** - The vertical axis represents the "PRICE" (Dollars per unit). - The horizontal axis represents the "QUANTITY" (Units). 2. **Curves:** - The upward-sloping orange line represents the "Supply" curve. - The downward-sloping blue line represents the "Demand" curve. 3. **Equilibrium:** - The point where the Supply and Demand curves intersect is the market equilibrium. This point determines the equilibrium price and quantity of the good in the market. 4. **Dashed Lines:** - Vertical and horizontal dashed lines extend from the equilibrium point to the respective axes, indicating the equilibrium quantity on the quantity axis and the equilibrium price on the price axis. **Instruction to the Reader:** 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.
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