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 anycompensation for that effect. If the impact on the third party is beneficial, it is called aexternality.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 themarket 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, thenyou 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 tothe private value, then you should drag the demand curve to reflect the social value of consuming the good.(?)PRICE (Dollars per unit)QUANTITY (Units)SupplyDemand¦ þDemandSupply

In a market, two types of externalities are positive and negative that depends upon the effect of an…

Answered: An externality arises when a firm or…

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter10: Externalities

Section10.1: Externalities And Market Inefficiency

Problem 1QQ

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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
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.
(?)
PRICE (Dollars per unit)
QUANTITY (Units)
Supply
Demand
¦ þ
Demand
Supply

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

Tim 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.

The local airport has doubled the number of runways, causing additional noise pollution for the surrounding residents.

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