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. Adjust the following graph 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. (Note: MPC stands for marginal private costs, MSC stands for marginal social costs, MPB stands for marginal private benefits, and MSB stands for marginal social benefits.) (?) PRICE (Dollars per unit) QUANTITY (Units) Supply Demand Demand O Supply With this type of externality, in the absence of government intervention, the market equilibrium than the socially optimal quantity. quantity produced will be Which of the following generate the type of externality previously described? Check all that apply. Nick has planted several trees in his backyard that increase the beauty of the neighborhood, especially during the fall foliage season. 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. 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, Crystal, has bought a cat to which you are allergic.

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Market Failure Analysis

To understand Market failure, we need to first understand welfare economics. An Italian economist, Vilfredo Pareto stated that allocation of resources in an efficient manner such that an economic change, which harms no one and makes someone better off, indicates an increase in social welfare. It is also called Pareto Optimality, where resources cannot further be reallocated without harming one. This does not apply to those economic changes, which harm some and benefit others. social welfare increases if the utility of any of its members' increases and none decrease in the economy.