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 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. Shift one of the curves to reflect the presence of the externality. If there are external costs of production, then you should shift the supply curve to reflect the social costs of producing the good; similarly, if there are external benefits from production, then you should shift the demand curve to reflect the social benefits from consuming the good. PRICE (Dollars per unit) QUANTITY (Units) Supply Demand 101 Demand Supply (?) With this type of externality, in the absence of government intervention, the market equilibrium quantity produced will be efficient quantity. Which of the following generate the type of externality previously described? Check all that apply. than the The city where you live has granted a permit to put a movie theater in your neighborhood, causing traffic jams at night and on weekends. Carlos has planted several trees in his backyard that increase the beauty of the neighborhood, especially during the fall foliage season. Your roommate, Megan, has bought a cat to which you are allergic. A leading electronics manufacturer has discovered a new technology that dramatically improves the picture quality of plasma televisions. Firms of all brands have free access to this technology.
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 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. Shift one of the curves to reflect the presence of the externality. If there are external costs of production, then you should shift the supply curve to reflect the social costs of producing the good; similarly, if there are external benefits from production, then you should shift the demand curve to reflect the social benefits from consuming the good. PRICE (Dollars per unit) QUANTITY (Units) Supply Demand 101 Demand Supply (?) With this type of externality, in the absence of government intervention, the market equilibrium quantity produced will be efficient quantity. Which of the following generate the type of externality previously described? Check all that apply. than the The city where you live has granted a permit to put a movie theater in your neighborhood, causing traffic jams at night and on weekends. Carlos has planted several trees in his backyard that increase the beauty of the neighborhood, especially during the fall foliage season. Your roommate, Megan, has bought a cat to which you are allergic. A leading electronics manufacturer has discovered a new technology that dramatically improves the picture quality of plasma televisions. Firms of all brands have free access to this technology.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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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 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.
Shift one of the curves to reflect the presence of the externality. If there are external costs of production, then you should shift the supply curve to
reflect the social costs of producing the good; similarly, if there are external benefits from production, then you should shift the demand curve to
reflect the social benefits from consuming the good.
PRICE (Dollars per unit)
QUANTITY (Units)
Supply
Demand
O
Demand
--
Supply
?
With this type of externality, in the absence of government intervention, the market equilibrium quantity produced will be
efficient quantity.
Which of the following generate the type of externality previously described? Check all that apply.
than the
The city where you live has granted a permit to put a movie theater in your neighborhood, causing traffic jams at night and on weekends.
Carlos has planted several trees in his backyard that increase the beauty of the neighborhood, especially during the fall foliage season.
Your roommate, Megan, has bought a cat to which you are allergic.
A leading electronics manufacturer has discovered a new technology that dramatically improves the picture quality of plasma televisions.
Firms of all brands have free access to this technology.
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