Externalities $-$ Definition and examples 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.

With this type of externality, in the absence of government intervention, the market equilibrium quantity produced will be than the socially optimal quantity. With this type of externality, in the absence of government intervention, the market equilibrium quantity produced will be

than the

socially optimal quantity.

Which of the following generate the type of externality previously described? Check all that apply.

Your roommate Megan has bought a puppy that barks all day while you are trying to study economics.

Felix has planted several trees in his backyard that increase the beauty of the neighborhood, especially during the fall foliage season.

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 traffic jams at night and on weekends.

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

externality.

The following graph shows the demand and supply curves for a good with this type of externality. The dashed drop lines on the graph reflect the

market equilibrium price and quantity for this good.

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.