Microeconomics · free preview
When Costs Land on Bystanders
A negative externality makes the private cost diverge from the social cost, markets overproduce, and the gap between the two quantities is a deadweight loss measured between the marginal social cost curve and demand.
1. The smoke next door
The smoke next door
2. Overproduction, precisely
Overproduction, precisely
3. External benefits run the film backward
External benefits run the film backward
4. Why the market cannot fix it
Why the market cannot fix it
5. Constructing social cost
Refineries supply sugar with marginal private cost given by their supply curve, and each unit of sugar causes a constant 10 dollars of smoke damage to nearby beekeepers. How is the marginal social cost curve constructed?
6. The overproduction
The sugar market clears at 24 dollars and 72 units on private costs. With a constant marginal external cost of 10 dollars, the efficient quantity is 60 units. What is the deadweight loss of the unpriced externality?
7. The efficient quantity
Demand is P = 60 - Q/2, marginal private cost is P = Q/3, and each unit causes 10 dollars of external damage. Setting demand equal to marginal social cost, 60 - Q/2 = Q/3 + 10, solve for the efficient quantity and write the number.
8. The direction of the error
When production imposes external costs on bystanders and prices ignore them, what does the market do relative to the efficient outcome?
9. External benefits run it backward
Vaccination protects the vaccinated and also strangers nearby. If the market prices only private benefits, what happens?
10. The social optimum
Demand is P = 80 - Q, marginal private cost is P = Q/2, and each unit causes 5 dollars of external damage. Compute the efficient quantity, and write the number.
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