AP MicroeconomicsMarket Failure & Government
Negative Externality
A negative externality is a cost imposed on a third party who is not part of a market transaction, such as pollution.
Because producers ignore these external costs, the market overproduces relative to the socially optimal quantity, creating deadweight loss. The marginal social cost exceeds the marginal private cost. Governments correct it with taxes, regulation, or tradable permits.
Formula / Example
Overproduction occurs because MSC > MSB at the market quantity.
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Study module
Public Goods & Externalities →
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