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 beneficial, it is called a positive externality The following graph shows the demand and supply curves for a good with this type of ex negative e dashed drop lines on the graph reflect the market equilibrium price and quantity for this good. positive 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. Supply Demand Supply PRICE (Dollars per unit) Demand Homework (Ch 10) Adjust one or both of the curves to reflect the presence of the externality. If the social cost of produk you should drag the supply curve to reflect the social costs of producing the good; similarly, if the so the private value, then you should drag the demand curve to reflect the social value of consuming th ? Supply Demand Supply PRICE (Dollars per unit) Demand QUANTITY (Units) QUANTITY (Units) than the With this type of externality, in the absence of government intervention, the market equilibrium quantity produced will be socially optimal quantity Which of the following generate the type of externality previously described? Check all that apply. The local airport has doubled the number of runways, causing additional noise pollution for the surrounding residents. Bob has planted several trees in his backyard that increase the beauty of the neighborhood, especially during the fall foliage season. A microbiology lab has published its breakthrough in swine flu research Your roommate Eric has bought a bird that keeps you up at night with its chleping. Grade It Now Save & Continue Continue without saving