What does a negative production externality diagram show?
It shows the marginal social cost curve (MSC) above the private supply curve (MPC), so the market produces where demand meets MPC, a larger quantity than the social optimum where demand meets MSC. The overproduced units form a deadweight loss triangle pointing back toward the optimum.
The diagram is a supply and demand graph with price (and cost) on the vertical axis and quantity on the horizontal axis. The demand curve is labeled MPB = MSB, because buyers are the only ones who benefit and nobody else is affected on the consumption side. The ordinary supply curve is labeled MPC, the marginal private cost firms actually pay. Above it sits a second curve, marginal social cost (MSC), which adds the damage done to third parties, such as pollution from a factory. The vertical gap between MSC and MPC is the marginal external cost of each unit.
Two quantities are marked on the horizontal axis. The market quantity, Qm, is where demand crosses MPC, because firms ignore the cost they push onto others. The socially optimal quantity, Qs, is where demand crosses MSC, and it lies to the left of Qm. The price at the social optimum is higher than the market price. The point of the diagram is the gap between the two quantities: the market overproduces the good and charges too little for it.
Here is the same picture in numbers. Let demand be P = 90 - Q, private supply be P = 10 + Q, and the external cost be $20 per unit, so MSC is P = 30 + Q. The market sets 90 - Q = 10 + Q, giving Qm = 40 at a price of $50. The optimum sets 90 - Q = 30 + Q, giving Qs = 30 at a price of $60.
The deadweight loss is the triangle over the units from 30 to 40. Its left corner is the social optimum at (30, $60). Its right side is the vertical line at Qm = 40, running from the demand curve at $50 up to the MSC curve at 30 + 40 = $70. Its area is 0.5 times 10 times 20 = $100. Each of those 10 units costs society more than buyers value it. Do not confuse this triangle with the total external cost, the band between MSC and MPC from 0 to 40, which is $20 times 40 = $800. Most of that damage comes from units worth producing; only the triangle is lost welfare.
The fix on the same graph is a Pigouvian tax equal to the marginal external cost. A $20 per-unit tax lifts MPC onto MSC, so the market lands at 30 units, buyers pay $60, and sellers keep $40. A consumption externality looks different: the external cost sits on the demand side, so the marginal social benefit curve is drawn below demand while supply stays MPC = MSC. A positive production externality flips this diagram, with MSC below MPC and the market producing too little. The positive vs negative externality comparison puts the negative production case next to the positive consumption case, and you can drag the curves on the externality sandbox.
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Related questions
- Which way does the deadweight loss triangle point on a negative externality graph?
- Its tip points left, toward the socially optimal quantity where demand crosses MSC. Its wide side is the vertical line at the market quantity, running from the demand curve up to the MSC curve. If your triangle opens toward the optimum, it is drawn backward.
- Is the MSC curve above or below the MPC curve for a negative production externality?
- Above. Marginal social cost equals marginal private cost plus marginal external cost, and a negative externality adds cost to third parties, so MSC sits higher than MPC by the external cost of each unit.
- What is the difference between a negative production externality and a negative consumption externality diagram?
- In a production externality the extra cost comes from making the good, so a second cost curve, MSC, is drawn above supply. In a consumption externality the harm comes from using the good, such as secondhand smoke, so a second benefit curve, MSB, is drawn below demand. Both show the market producing more than the socially optimal quantity.