**Understanding Externalities in Economics**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 graph displays two main curves: a blue demand curve and an orange supply curve.- The x-axis represents the quantity of the good.- The y-axis represents the price of the good in dollars per unit.- The point where the blue demand curve intersects with the orange supply curve indicates the market equilibrium, represented by dashed drop lines for both price and quantity.**Instructions for Adjusting Curves Due to Externalities:**1. **Adjusting Supply Curve:** - 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.2. **Adjusting Demand Curve:** - 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.**Tools Available:**- Sliders labeled "Demand" and "Supply" are provided next to the graph, allowing for the adjustment of the respective curves to reflect the presence of externalities appropriately.By understanding and adjusting these curves, students can better comprehend how externalities affect market equilibrium and the well-being of third parties involved. ### Externalities and Market Equilibrium**Homework (Ch 10)****Graph Analysis:**The graph provided shows the market equilibrium with the inclusion of supply and demand curves. - The x-axis represents Quantity (Units).- The y-axis represents Price (Dollars per Unit).- The blue line represents the Demand curve.- The orange line represents the Supply curve.- The point where the supply and demand curves intersect is the market equilibrium.The graph is further annotated with an additional dotted line that appears to indicate a deviation from the socially optimal quantity or price level due to externalities.**Question:**With this type of externality, in the absence of government intervention, the market equilibrium quantity produced will be _______ than the socially optimal quantity.**Answer Choices:**- More- Less**Multiple Choice Question:**Which of the following generate the type of externality previously described? Check all that apply.- [ ] Your roommate Nick has bought a bird that keeps you up at night with its chirping.- [ ] The local airport has doubled the number of runways, causing additional noise pollution for the surrounding residents.- [ ] Jake has planted several trees in his backyard that increase the beauty of the neighborhood, especially during the fall foliage season.- [ ] A leading software company has decided to increase its research budget for inventing new open-source technologies.This exercise helps in understanding how externalities affect market equilibrium and the discrepancy between market and socially optimal outcomes.

When the manufacturing or consumption of a product results in a cost being incurred by a third…

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 externality. compensation for that effect. If the impact on the third party is adverse, it is called a 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. (?) 10 Supply Demand

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 externality. compensation for that effect. If the impact on the third party is adverse, it is called a 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. (?) 10 Supply Demand

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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