Externalities

Thiss how I understand

them

Positive Externalities
Example: Education

Positive Externalities

Here is the graph present cost and benefit of education.

Without considering externality, quantity is at Qp.
Cost benefit
MPC

MPB

Qp

Output

Positive Externalities
But education bring more benefit to society
Beside private benefit, we have external benefit
Cost benefit
MPC

External Benefit

MSB

MPB

Qp

Qs

social optimum output

Output

Positive Externalities

cause of the external benefit, marginal social benefit is over marginal private ben
he social quantity demand Qs
< Qs Market Failure
Cost benefit

Deadweight loss of externality / Welfare loss

MPC

MSB

MPB

Qp

Qs

social optimum output

Output

Positive Externalities

vernment can implement subsidy to solve this situation, but how much subsidy?

Cost benefit

Deadweight loss of subsidy

MPC
Subsidy per unit

MSB
Subsidy paid
MPB

Qp

Qs

social optimum output

Output

Negative Externalities
Example: Steel production
causes pollution

Negative Externalities

Here is the graph present cost and benefit of producing steel.

Without considering externality, quantity is at Qp.
Cost benefit

MPC

MPB
Qp

Output

Negative Externalities

However, producing steel causes more cost to society

Beside private cost, we have external cost
Cost benefit
MSC

MPC
External Cost

MPB
Qp

Output

Negative Externalities

cause of the external cost, marginal social cost is over marginal private cost
The social quantity demand Qs
> Qs Market Failure
Cost benefit
MSC

Deadweight loss of externality / Welfare los

MPC

social optimum output MPB

Qs

Qp

Output

Negative Externalities

overnment can implement tax to solve this situation, but how much tax?
ets say its fixed tax)
Cost benefit
MSC

Tax per unit

MPC

Tax Revenue
Deadweight loss of tax

social optimum output MPB

Qs

Qp

Output

Thats how I understand

externalities graphs
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Positive Externalities
Cost benefit
MPC
New point

External benefit

Old point

MSB

MPB

Qp

Qs

Output

Negative Externalities
Cost benefit
MSC

MPC
External benefit

New point

Old point
Qs

Qp

MPB
Output

Negative Externalities
Cost benefit
MSC

MPC

MPB
Qs

Qp

Output