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Unit 2 - BE-Negative Externality

The document discusses negative externalities, particularly in production, where third parties bear costs without benefiting, such as pollution from a paper mill affecting nearby residents. It explains the concepts of marginal private cost (MPC) and marginal social cost (MSC), highlighting the welfare loss due to overproduction in free markets. The document also suggests government interventions like taxes and regulations to address these externalities and align production with socially optimal levels.

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353 views4 pages

Unit 2 - BE-Negative Externality

The document discusses negative externalities, particularly in production, where third parties bear costs without benefiting, such as pollution from a paper mill affecting nearby residents. It explains the concepts of marginal private cost (MPC) and marginal social cost (MSC), highlighting the welfare loss due to overproduction in free markets. The document also suggests government interventions like taxes and regulations to address these externalities and align production with socially optimal levels.

Uploaded by

nithingladgomez
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Negative Externalities

• A paper mill effluents emptying into a water stream affect the people who live
nearby.
The stream may be stinking and people suffer from it and may fall ill; the stream
may become a colony for mosquitoes forcing them to buy appliances or
repellents or bear the cost of treatment.
It may be a river or a lake where people once enjoyed fishing, boating and
swimming but with increasing pollution they are losing them. Thus, the industry
is costing them negatively. These people are the third party bearing the cost of
the activity without benefitting in any manner from it.
• low flying aircrafts cause a lot of noise to those living near the airport and disturb
their sleep.
• New railway lines may disturb the buildings nearby and people may lose their
earlier quietness.
Case of Negative Externality in Production
Case of Negative Externality in Production
• X-axis: Quantity of output
• Y-axis: Price/Cost/Benefit
• Demand Curve (MPB): Represents the marginal private benefit, which is assumed to be
equal to the marginal social benefit (MSB) when there are no consumption externalities
• Marginal Private Cost (MPC): The cost borne by the producer for each additional unit of
output.
• Marginal Social Cost (MSC): The total cost to society for each additional unit of output,
including both private costs and external costs.
• Free Market Equilibrium (Qpri): The point where MPC intersects MPB (and MSB). This is
where the market would naturally settle without intervention.
• Socially Optimal Quantity (Qsoc): The point where MSC intersects MSB. This is the
quantity that would be produced if all costs were considered.
• Welfare Loss Triangle: The area between the MPC and MSC curves, from Qsoc to Qpri.
This represents the loss of social welfare due to overproduction.
Case of Negative Externality in Production
• This overproduction results in a welfare loss, as the cost to society is greater than
the benefit.
• In a market with a negative production externality, the market equilibrium (Qpri)
is above the socially optimal level of production (Qsoc) because the private
producer only takes into account their own benefit and not the negative impact
on society.
• This leads to a deadweight loss (shaded area in the diagram) which represents
the loss of social welfare due to the over-production of the good or service.
• Examples of negative production externalities include pollution from factories,
noise pollution from construction, and the use of pesticides in agriculture.
• Governments can use various policies to correct for negative externalities, such as
taxes, regulations, or tradable permits, to bring production closer to the socially
optimal level.

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