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 adverse, 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.\fWith this type of extemality, in the absence of government intervention, the market equilibrium quantity produced will be V than the socially optimal quantity. Which of the following generate the type of externality previously described? Check all that apply. D A leading software company has decided to increase its research budget for inventing new open-source technologies. C] The city where you live has granted a permit to put a movie theater in your neighborhood, causing traffic jams at night and on weekends. Cl Dmitri has planted several trees in his backyard that increase the beauty of the neighborhood, especially during the fall foliage season. C Your roommate Rosa has bought a cat to which you are allergic. 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 adverse, it is called a externality. The following graph shows the demand and supply curves for a good with this type of negative The dashed drop lines on the graph reflect the market equilibrium price and quantity for this good. positive With this type of externality, in the absence of government intervention, the market equilibrium quantity produced will be than the socially optimal quantity. greater Which of the following generate the type of externality previously described? Check all that apply. less