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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 extemality. The following graph shows the demand and supply curves for a good with this type of externality. The deshed drop lines on the graph reflect the free market equilibrium price and quantity for this good. Shift one of the curves to reflect the presence of the externality. That is, if the social marginal cost (MCS) of producing the good is not equal to the private marginal cost (MC), then you should shift the supply curve to reflect the social costs of producing the good; similarly, if the social marginal benefit (MBS) of producing the good is not equal to the private marginal benefic (MB), then you should shift the demand curve to reflect the social benefits from consuming the good. Note: Select and drag one or both of the curves to the desired position. Curves will smap into position, so If you try to move a curve and it snaps back to its original position, just drag it a little farther. -O Supp Demand Supply PRICE (Dollars per unit) Demand QUANTITY (Units) With this type of externality, in the absence of government intervention, the competitive market quantity produced will be than the allocationly efficient quantity. Which of the following generate the type of externality described? Check all that apply. O The local airport has doubled the number of runways, causing additional noise pollution for the surrounding residents. O Your roommate, Ana, has bought a puppy that barks all day while you are trying to study economics. A leading electronics manufacturer has discovered a new technology that dramatically improves the picture quality of plasma televisions. Firms of all brands have free access to this technology- O Rajiv has planted several trees in his backyard that increase the beauty of the neighborhood, especially during the autumn foliage season.ivity that affects the wellbeing of a third party, yet neither pays nor receives any is adverse, it is called a externality. a good with this type of negative The dashed drop lines on the graph reflect the free positiveity produced will be than the JEDEBID he surrounding residents. anomice