Negative externalities

Question 1

What are negative externalities of production ?

Answer 1

The costs to 3rd parties as a result of actions from producers

When MSC is greater than MPC

Air pollution and resource depletion

Question 2

Explain the negative externalities of production diagram

Answer 2

The market allocates scarce resources at the private level ( wrong level ) which causes the price to be too cheap as firms are ignoring the costs of their actions when it should be at the socially optimum level where it is more expensive as they take onboard the entire cost of their actions

Question 3

What are negative externalities of consumption ?

Answer 3

The cost to 3rd parties as a result of consumer action

MSB is less than MPB

Smoking , drink , drugs

Question 4

Explain the negative externalities of consumption diagram ?

Answer 4

Consumers ignore the full cost of their actions due to self interest , so the market allocates scarce resources at P1Q1 which leads to overconsumption and production of the good as it is too cheap . If it was provided at the social optimum it would be more expensive and as a result people would reduce consumption and reduce production