Negative Externailites

Question 1

What is negative externalities

Answer 1

Negative externalities are the adverse spill over effects to 3rd parties that are not directly involved in consumption/production of the good, and there are no compensation made

Question 2

What are the common type of negative externalities

Answer 2

Cigarettes

Question 3

What is the graph negative externalities

Answer 3

Draw a graph and check
Q2 is less than Q1

Question 4

Graphical analysis

Answer 4

1. Assuming that there are no positive externalities there’s a divergence between MPC and MSC due to MEC
2. The current market equilibrium is at Q1 where MPC= MPB
3. However the socially optimal level is at Q2 where MSB = MSC , where society’s welfare is maximised and allocative efficiency is achieved
4. Since Q2 is less than Q1 , there is overconsumption/ overproduction of the good
5. Deadweight loss is incurred , since every additional unit of output beyond socially optimal level add more to cost than benefit.
6. Since societies welfare is not maximised, and allocative efficiency is not achieved, there is market failure
7. Therefore a government needs to intervene to solve market failure.