Negative Externality of Production

Front

What is the relationship between Marginal Social Benefit (MSB) and Marginal Private Benefit (MPB) in the context of negative externality of production?

Back

MSB is assumed to be equal to MPB as the focus is on the producer side of the market.

Front

Where can the free-market equilibrium be found in the context of negative externality of production?

Back

At the point where Marginal Private Cost (MPC) equals Marginal Social Benefit (MSB).

Front

What happens to the gap between MPC and Marginal Social Cost (MSC) as external costs in production increase?

Back

The larger the external costs in production, the larger the gap between MPC and MSC.

Front

What is the optimum allocation of resources from society’s point of view regarding MSB and MSC?

Back

The optimum allocation occurs where MSB equals MSC.

Front

What does the pink triangle represent in the context of over-provision of goods/services?

Back

It represents a welfare loss to society.

Front

What should be done to achieve social efficiency in the production of goods/services with negative externalities?

Back

Fewer factors of production should be allocated to producing the good/service.

Front

What opportunities exist for government intervention to improve market efficiency in the case of negative externalities?

Back

Indirect taxes, legislation, regulation, etc.

Front

What is the consequence of the free market failing in the context of negative externalities?

Back

There is an over-provision of the good/service.

Front

What is the significance of the equilibrium where MSB equals MSC?

Back

There is no market failure at this equilibrium.