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Negative Externalities
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📈 Economics
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Equations
Demand (MPD)
P =
Supply (MPC)
P =
Parameters
External Cost per Unit
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MSC = MPC + external cost (same slope, intercept raised).
Key Concepts
•
MPC
(Marginal Private Cost) reflects only the producer's costs
•
MSC
(Marginal Social Cost) = MPC + external cost (e.g. pollution)
• The free market produces at MPC ∩ MPD, which is more than the social optimum (MSC ∩ MPD)
• The orange triangle is
deadweight loss
— welfare lost due to overproduction
• Corrective tax (Pigouvian tax) equal to the external cost restores the optimum
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