Worksheet: Externalities

1 Diagram: External cost of production

Using a correctly labelled externality diagram show the impact of rising global carbon emissions on residents in
Bangladesh (who are likely to experience increased flooding). 1.1 On the diagram identify the socially optimal level of
output and the market determined level of output. 1.2 Shade in the welfare loss.

1.3 What is the problem at the market-determined level of

output? ______________________________________

____________________________________________

____________________________________________

____________________________________________

1.4 Governments impose various policies to reduce negative

externalities. Their aim is to _______________________ the
negative externality and therefore bring it back into the
____________ mechanism.
Class Worksheet Answer:

1.1 See graph

1.2 See graph
1.3 Over-production, because of the failure to account for the external costs suffered by residents in Bangladesh.
1.4 Governments impose various policies to reduce negative externalities. The aim of these is to internalise the
negative externality and therefore bring it back into the market mechanism.