Imagine that firms produce shirts and that producing each shirt generates a negative externality, which we will call pollution. 

a. Draw supply and demand curves when firms treat the pollution as an externality and show how they would change if firms were to instead consider the externality as part of their costs. 

b. How does failing to consider the externality affect the equilibrium price and quantity of shirts, relative to the case where firms consider the externality?

Answer rating: 100% (QA)

a Externalities are negative side effects The firm usually does not take into account such exte... View the full answer