6.2 Externalities
Externalities are spillover costs or benefits to third parties: negative ones cause overproduction, positive ones underproduction; both create deadweight loss.
A negative externality like pollution imposes costs on bystanders, so marginal social cost = marginal private cost + marginal external cost, putting the MSC curve above supply. The market settles where MPB = MPC, which is MORE than the socially optimal quantity where MSB = MSC — overproduction, with deadweight loss on the units between the two quantities.
A positive externality like vaccination or education benefits bystanders, so MSB lies above the demand curve (MPB). The market now produces LESS than the social optimum — underproduction, again with deadweight loss on the missing units.
The textbook fixes internalize the externality: a per-unit (Pigouvian) tax equal to the marginal external cost shifts private cost up to MSC, and a per-unit subsidy equal to the marginal external benefit shifts private benefit up to MSB. Both push the market to the socially optimal quantity.
Key terms for 6.2
Drag the curves yourself — the fastest way to make 6.2 stick.
Practice the math
Drawing the deadweight-loss triangle pointing away from the socially optimal quantity. DWL always points TO the MSB = MSC intersection, covering the units between the market quantity and the optimal quantity.
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