a post describing a real-world example of a negativeexternality.

• Be specific about the difference between the private and social cost associated with the activity that creates theexternality.
• Describe how the difference between social and private costs impacts the amount of the good/activity provided in equilibrium.
• Relative to the social optimum, is there too much or too little of the good provided in equilibrium?
• Provide your best guess of the size of theexternality(in terms of dollars).
• How can the government "fix" the problem created by theexternality(achieve the social optimum in equilibrium)?

Example:When people litter, they are imposing a cost on other people who are not directly involved in the activity that generated the pollution. Cities and businesses have to pay people to clean up the streets, or sweep parking lots because others don't take the time to throw their trash away. I have even seen litter on a backpacking trip next to a beautiful lake in the mountains. Everyone who has to see that litter, and eventually the person who will pack it out, has to pay an extra cost due to activities they were not directly involved in. This is the definition of a negative externality. Because an individuals' private cost for littering is less than the social cost, too many people litter in equilibrium. To 'fix' this problem the government has placed a tax on littering in the form of a fine. Anyone who gets caught littering may have to pay a large fine. This 'tax' on littering reduces the amount of pollution in equilibrium by increasing everyone's private cost for littering, bringing it closer to the social cost.