Get premium membership and access questions with answers, video lessons as well as revision papers.

Using a graph, show negative implications of externalities for allocation efficiency

Using a graph, show negative implications of externalities for allocation efficiency

Answers

In a free market where the optimality rules have been followed the quantity produced will
occur at quantity Xp and price Pm, the point where demand (D) equals the private marginal
cost (PMC). However where a negative externality exists the market fails to produce the
socially optimal level of production. This is because the marginal damage (d), generated by
the negative externality, is a cost not taken in to account in the market. When a social
marginal cost (SMC) curve is generated it is possible to see that socially optimal level of
production is in fat X* and that the product should be sold at a higher price P* to reflect the fact that the true social cost of the product is higher than the private cost.

---

NatalieR answered the question on June 21, 2022 at 08:19

Next: Discuss three levels of conflict of interest
Previous: Illustrate implications of optimality rules of a positive externality and its effects

View More Public Finance Questions and Answers | Return to Questions Index

Related Questions

• Discuss three levels of conflict of interest(Solved)
  

  Discuss three levels of conflict of interest

  Date posted: June 21, 2022.  Answers (1)

• Explain two instruments of stabilization policy(Solved)
  

  Explain two instruments of stabilization policy

  Date posted: June 21, 2022.  Answers (1)

• Using phillip's curve, explain the relationship between inflation and unemployment(Solved)
  

  Using phillip's curve, explain the relationship between inflation and unemployment

  Date posted: June 21, 2022.  Answers (1)

• What are the actions/activities involved in implementation of fiscal instruments of distribution policy?(Solved)
  

  What are the actions/activities involved in implementation of fiscal instruments of distribution policy?

  Date posted: June 21, 2022.  Answers (1)

• What are differences between social goods and private goods?(Solved)
  

  What are differences between social goods and private goods?

  Date posted: June 21, 2022.  Answers (1)

• What are the limitations of the principle of maximum social advantage?(Solved)
  

  What are the limitations of the principle of maximum social advantage?

  Date posted: June 21, 2022.  Answers (1)

• Explain the concept of the principle of maximum social advantage and it's simplifying assumptions(Solved)
  

  Explain the concept of the principle of maximum social advantage and it's simplifying assumptions

  Date posted: June 21, 2022.  Answers (1)

• Briefly describe the scope of government activities in public finance(Solved)
  

  Briefly describe the scope of government activities in public finance

  Date posted: June 21, 2022.  Answers (1)

• Define public finance(Solved)
  

  Define public finance

  Date posted: June 21, 2022.  Answers (1)

• Argue the case for privatization of state corporations.(Solved)
  

  Argue the case for privatization of state corporations.

  Date posted: May 6, 2022.  Answers (1)