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That's how I understand externality graphs

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- 1. Externalities<br />This’s how I understand them…<br />
- 2. Positive Externalities<br />Example: Education <br />
- 3. Positive Externalities<br />Here is the graph present cost and benefit of education.<br />Without considering externality, quantity is at Qp. <br />Cost benefit<br />MPC<br />MPB<br />Output<br />Qp<br />
- 4. Positive Externalities<br />But education bring more benefit to society <br /> Beside private benefit, we have external benefit<br />Cost benefit<br />MPC<br />External Benefit<br />MSB<br />MPB<br />social optimum output <br />Output<br />Qp<br />Qs<br />
- 5. Positive Externalities<br />Because of the external benefit, marginal social benefit is over marginal private benefit<br />The social quantity demand Qs<br />Qp < Qs Market Failure<br />Deadweight loss of externality / Welfare loss<br />Cost benefit<br />MPC<br />MSB<br />MPB<br />social optimum output <br />Output<br />Qp<br />Qs<br />
- 6. Positive Externalities<br />Government can implement subsidy to solve this situation, but how much subsidy? <br />Cost benefit<br />Deadweight loss of subsidy<br />MPC<br />Subsidy per unit<br />MSB<br />Subsidy paid<br />MPB<br />social optimum output <br />Output<br />Qp<br />Qs<br />
- 7. Negative Externalities<br />Example: Steel production causes pollution<br />
- 8. Negative Externalities<br />Here is the graph present cost and benefit of producing steel.<br />Without considering externality, quantity is at Qp. <br />Cost benefit<br />MPC<br />MPB<br />Output<br />Qp<br />
- 9. Negative Externalities<br />However, producing steel causes more cost to society <br /> Beside private cost, we have external cost<br />Cost benefit<br />MSC<br />MPC<br />External Cost<br />MPB<br />Output<br />Qp<br />
- 10. Negative Externalities<br />Because of the external cost, marginal social cost is over marginal private cost<br />The social quantity demand Qs<br />Qp > Qs Market Failure<br />Cost benefit<br />MSC<br />Deadweight loss of externality / Welfare loss<br />MPC<br />MPB<br />social optimum output <br />Output<br />Qp<br />Qs<br />
- 11. Negative Externalities<br />Government can implement tax to solve this situation, but how much tax? <br />(Let’s say it’s fixed tax)<br />Cost benefit<br />MSC<br />MPC<br />Tax per unit<br />Tax Revenue<br />Deadweight loss of tax<br />MPB<br />social optimum output <br />Output<br />Qp<br />Qs<br />
- 12. That’s how I understand externalities graphs…<br />Please help me understand the problem better by answering my questions written in Notes, or send me feedback to my blog www. http://istudyecon.blogspot.com/<br />Thank you so much for your time<br />
- 13. Positive Externalities<br />Cost benefit<br />MPC<br />New point<br />External benefit<br />MSB<br />Old point<br />MPB<br />Output<br />Qp<br />Qs<br />
- 14. Negative Externalities<br />Cost benefit<br />MSC<br />MPC<br />External benefit<br />New point<br />Old point<br />MPB<br />Output<br />Qp<br />Qs<br />
- 15. Negative Externalities<br />Cost benefit<br />MSC<br />MPC<br />MPB<br />Output<br />Qp<br />Qs<br />

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