1. Externalities - Definition and examples An externality arises when a firm or person engages in an activity that affects the wellbeing of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is beneficial, it is called a_ externality. The following graph shows the demand and supply curves for a good with this type of externality. The dashed drop lines on the graph reflect the market equilibrium price and quantity for this good. Adjust one or both of the curves to reflect the presence of the externality. If the social cost of producing the good is not equal to the private cost, then you should drag the supply curve to reflect the social costs of producing the good; similarly, if the social value of producing the good is not equal to the private value, then you should drag the demand curve to reflect the social value of consuming the good. O Supply Demand Supply PRICE (Dollars per unit) Demand QUANTITY (Units)1. Externalities - Definition and examples An externality arises when a firm or person engages in an activity that affects the wellbeing of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is beneficial, it is called a externality. The following graph shows the demand and supply curves for a good with this type of ex negative e dashed drop lines on the graph reflect the market equilibrium price and quantity for this good. positive Adjust one or both of the curves to reflect the presence of the externality. If the social cost of producing the good is not equal to the private cost, then you should drag the supply curve to reflect the social costs of producing the good; similarly, if the social value of producing the good is not equal to the private value, then you should drag the demand curve to reflect the social value of consuming the good.With this type of externality, in the absence of government intervention, the market equilibrium quantity produced will be '7 than the socially optimal quantity. - greater Which of the following generate the type of externality previously described? Check all that apply. E C] A microbiology lab has published its breakthrough in swine flu research. C] Alex has planted several trees in his backyard that increase the beauty of the neighborhood, especially during the fall foliage season. C] The local airport has doubled the number of runways, causing additional noise pollution for the surrounding residents. C] Your roommate Clancy has bought a bird that keeps you up at night with its chirping. 2. Efficiency in the presence of externalities Public wifi hotspots grant many external benefits on society: more equitable access to the internet, increased educational opportunities, and so on. Therefore, the market equilibrium quantity of public wifi hotspots does not equal the socially optimal quantity. The following graph plots the demand for public wifi hotspots (their private value), the supply of public wifi hotspots (the private cost of producing them), and the social value of public wifi hotspots, including both the private value and external benefits. Use the black point (plus symbol) to indicate the market equilibrium quantity. Next, use the purple point (diamond symbol) to indicate the socially optimal quantity. Supply (Private Cost) Market Equilibrium Socially Optimal Level PRICE OF PUBLIC WIFI HOTSPOTS Social Value Demand (Private Value) QUANTITY OF PUBLIC WIFI HOTSPOTS3. The effect of negative externalities on the optimal quantityof consumption Consider the market for pharmaceuticals. Suppose that a pharmaceutical factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing additional pharmaceuticals imposes a constant per-unit external cost of $600. The following graph shows the demand (private value) curve and the supply (private cost) curve for pharmaceuticals. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $600 per unit. 2000 1800 Social Cost 1600 O 1400 O 1200 O 1000 Supply PRICE (Dollars per unit of pharmaceuticals) Private Cost) 800 O Demand 600 (Private Value) 400 200 0 2 3 5 7 QUANTITY (Units of pharmaceuticals)The market equilibrium quantity is * units of pharmaceuticals, but the socially optimal quantity of pharmaceuticals production is units. To create an incentive for the firm to produce the socially optimal quantity of pharmaceuticals, the government could impose a of $ per unit of pharmaceuticals.1600 1400 1.5 1200 2 1000 Supply PRICE (Dollars per unit of pharmaceutics (Private Cost) 800 2.5 O Demand 600 3 (Private Value) 400 3.5 200 4 0 4.5 1 2 3 5 8 7 QUANTITY (Units naceuticals) 5 5.5 The market equilibrium quantity is units of pharmaceuticals, but the socially optimal quantity of pharmaceuticals production is units. To create an incentive for the firm to produce the socially optimal quantity of pharmaceuticals, the government could impose a of per unit of pharmaceuticals.Social Cost 1600 1400 1.5 1200 O 2 1000 Supply PRICE (Dollars per unit of pharmaceuticals) (Private Cost) 2.5 800 Demand (Private Value) 3 600 400 O 3.5 200 4 4.5 1 2 3 5 7 QUANTITY (Units of pharmaceuticals) 5 5.5 The market equilibrium quantity is * units of pharmaceuticals, but the socially optimal quantity of pharmaceuticals production is L Junits. To create an incentive for the firm to produce the socially optimal quantity of pharmaceuticals, the government could impose a of S per unit of pharmaceuticals.Demand 600 (Private Value) PRICE (Dollar 400 200 1 2 3 5 8 7 QUANTITY (Units of pharmaceuticals) subsidy The market equilibrium quantity is * units of pharmaceuticals, but the socially optimal quantity of pharmaceuticals producti units. tax To create an incentive for the firm to produce the socially optimal quantity of pharmaceuticals, the government could impose a of $ per unit of pharmaceuticals