Microeconomics - Negative & Positive Externalities

Figure 1 - The diagram illustrates demand and supply curves in markets with externalities.

• Market Equilibrium:
  - Price: 5
  - Quantity: 60
• Type of Externality:
  - Negative Externality
  - Details: Negative externalities occur when the production or consumption of a good or service imposes a cost on a third party. In this case, the market equilibrium quantity is higher than the socially optimal quantity, leading to overproduction.
• Socially Efficient Equilibrium (Social Optimum):
  - Price: 6.50
  - Quantity: 50
  - Details: The socially efficient equilibrium is achieved when the quantity of the good or service produced reflects all the costs and benefits, including the external costs. In this case, the price is higher, and the quantity is lower than the market equilibrium.
• Internalizing the Externality:
  - Tax
  - Details: Internalizing the externality means adjusting the market to account for the external costs. A tax is imposed on producers to make them account for the external costs of production.
• Tax Amount:
  - 1.50 per unit
  - Details: By imposing a tax of 1.50 per unit, the supply curve shifts upward, leading to a new market equilibrium that aligns with the socially efficient equilibrium.

Figure 2 - The diagram illustrates demand and supply curves in markets with externalities.

• Market Equilibrium:
  - Price: 40
  - Quantity: 400
• Type of Externality:
  - Positive Externality
  - Details: Positive externalities occur when the production or consumption of a good or service creates a benefit for a third party. In this case, the market equilibrium quantity is lower than the socially optimal quantity, leading to underproduction.
• Socially Efficient Equilibrium (Social Optimum):
  - Price: 30
  - Quantity: 500
  - Details: The socially efficient equilibrium is achieved when the quantity of the good or service produced reflects all the costs and benefits, including the external benefits. In this case, the price is lower, and the quantity is higher than the market equilibrium.
• Internalizing the Externality:
  - Subsidy

- Details: Internalizing the externality means adjusting the market to account for the external benefits. A subsidy is provided to consumers or producers to encourage more production and consumption.