This document discusses positive and negative externalities through examples and graphs. For positive externalities like education, the social benefit is greater than the private benefit, leading the market equilibrium to be less than the socially optimal level. For negative externalities like pollution from steel production, the social cost is greater than the private cost, so the market equilibrium is greater than the optimal level. The document explains how government policies like subsidies or taxes can help correct these market failures by aligning private and social costs/benefits. It concludes by asking for feedback to improve the author's understanding of externalities graphs.

1. ExternalitiesThis’s how I understand them…

2. Positive ExternalitiesExample: Education

3. Positive ExternalitiesHere is the graph present cost and benefit of education.Without considering externality, quantity is at Qp. Cost benefitMPCMPBOutputQp

4. Positive ExternalitiesBut education bring more benefit to society  Beside private benefit, we have external benefitCost benefitMPCExternal BenefitMSBMPBsocial optimum output OutputQpQs

5. Positive ExternalitiesBecause of the external benefit, marginal social benefit is over marginal private benefitThe social quantity demand QsQp < Qs  Market FailureDeadweight loss of externality / Welfare lossCost benefitMPCMSBMPBsocial optimum output OutputQpQs

6. Positive ExternalitiesGovernment can implement subsidy to solve this situation, but how much subsidy? Cost benefitDeadweight loss of subsidyMPCSubsidy per unitMSBSubsidy paidMPBsocial optimum output OutputQpQs

7. Negative ExternalitiesExample: Steel production causes pollution

8. Negative ExternalitiesHere is the graph present cost and benefit of producing steel.Without considering externality, quantity is at Qp. Cost benefitMPCMPBOutputQp

9. Negative ExternalitiesHowever, producing steel causes more cost to society  Beside private cost, we have external costCost benefitMSCMPCExternal CostMPBOutputQp

10. Negative ExternalitiesBecause of the external cost, marginal social cost is over marginal private costThe social quantity demand QsQp > Qs  Market FailureCost benefitMSCDeadweight loss of externality / Welfare lossMPCMPBsocial optimum output OutputQpQs

11. Negative ExternalitiesGovernment can implement tax to solve this situation, but how much tax? (Let’s say it’s fixed tax)Cost benefitMSCMPCTax per unitTax RevenueDeadweight loss of taxMPBsocial optimum output OutputQpQs

12. That’s how I understand externalities graphs…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/Thank you so much for your time

13. Positive ExternalitiesCost benefitMPCNew pointExternal benefitMSBOld pointMPBOutputQpQs

14. Negative ExternalitiesCost benefitMSCMPCExternal benefitNew pointOld pointMPBOutputQpQs

15. Negative ExternalitiesCost benefitMSCMPCMPBOutputQpQs