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Negative Externalitites (Production (External cost created by produers…
Negative Externalitites
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Production
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Diagram
The supply curve S = MPC reflects the firm's private cost of production. The MSC represents the full costs to society of producing cement. In this case, social costs of producing cement given by MSC are GREATER than the firm's private costs. The vertical difference between MSC and MPC represents the external costs. The demand curve represents both MPB and MSB
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Externality
Occurs when the actions of consumers or producers give rise to negative or positive side-effects on other people who are not part of these actions (the third party).
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Solutions
Government Regulation
Advantages
Simple compared to market based solutions. Force polluting firms to comply, more effective.
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