Suppose supply is P= ―3 + (2/5)Qs and demand is P= 51 ― (1/10)Qd. Further, suppose that each unit carries a negative externality that costs someone in society $4. What is the socially optimal quantity, and how much would buyers need to pay and producers need to receive to achieve that outcome?
Suppose supply is P= ―3 + (2/5)Qs and demand is P= 51 ― (1/10)Qd. Further, suppose that each unit carries a negative externality that costs someone in society $4. What is the socially optimal quantity, and how much would buyers need to pay
and producers need to receive to achieve that outcome?
Externalities: When a firm produces a good sometimes it creates cost or benefits for other firms. If it is creating cost for other firms, we can say that the firm is creating negative externality, here the firm is creating cost for another firm without bearing that. On the other hand, in the case of positive externalities the firm creates benefits for other firms. In the case of negative externality there would be overproduction in the free market and in the case of positive externality there is overproduction in the free market. Hence, we can say that externalities (both positive and negative) leads to the market failure and hence makes a scope for the government to correct it.
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