1. Externalities - Definition and examples An externality arises when a rm 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 V externality. The following graph shows the demand and supply curves for a good with this type of he dashed drop lines on the graph reflect the market equilibrium price and quantity for this good. Shift one or both of the curves to reect the presence of the externality. If the social cost of producing the good is not equal to the private cost, then you should shift the supply curve to reect 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 shift the demand curve to reect the social value of consuming the good. \fWith this type of externality, 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. E :] Gilberto has planted several trees in his backyard that increase the beauty of the neighborhood, especially during the fall foliage season. :1 Your roommate Teresa has bought a cat to which you are allergic. :] 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. :] The city where you live has granted a permit to put a movie theater in your neighborhood, causing trafc jams at night and on weekends