Negative Externalities of Production

Identify the points that represent the equilibrium price and quantity without any externalities existing (socially optimal price and quantity).

Circle the actual equilibrium point that shows the steel firm overproducing as it is not considering its cost on society.

Which answers below are included in the yellow "welfare loss" triangle?

• Creation of jobs, economic growth

• factory pollution, effect on local biodiversity

• staff training, pollution, cleaner local area

• costs of the land, labour, capital included in production

Label correctly on the diagram:

a

b

c

d

e

Price of steel

MSC

MSB

Welfare Loss

MPC

Name the private costs and the external costs for a firm producing steel.

Groups:

(a) Private Costs

,

(b) External Costs

• Fossil Fuel Pollution

• Health of Sick Workers

• Cost of the Factory Land

• Biodiversity Damage from Smoke

• Cost of Factory Machinery

• Workers Payment

The government intervene to try to "internalise the externality" - to make the steel producer pay for external costs. If they impose a tax on the producer, draw a line from MPC showing the effect of the tax. Call it MPC+tax. Show it removing the welfare loss.