How do externalities make the market choose a different quantity from society?
Add marginal external cost or benefit to the private side and find the social intersection.
Follow the cause and effect
Find the market outcome from MB=MPC.
Construct MSC=MPC+MEC or MSB=MPB+MEB.
Find efficient Q and choose an instrument aligning private and social margins.
The model you are using
Conditions for this model
Competition, no demand externality, fixed emissions per output unit and known MEC.
The exam trap
The optimal Pigouvian tax equals MEC at efficient Q, not total damage.
Connect the reasoning to the graph
What changes
- A negative production externality places social cost above private supply; efficient Q is left of market output.
What stays fixed
Competition, no demand externality, fixed emissions per output unit and known MEC.
Keep these conditions throughout the comparison; change only what the case above specifies.
What to inspect
Find efficient Q and choose an instrument aligning private and social margins.
Compare before and after, and locate the conclusion on the graph.
5 MINUTES · TRANSFER THE IDEA
Can you explain it without the lesson?
Convert the case to a positive consumption externality and identify the adjusted curve and Q direction.