Question

Draw a graph involving an MB curve and an MAC curve where the pollution is so harmful that NO pollution should be allowed according to efficiency standard. Be sure to properly label the axes.

Answer 1

In the diagram above, MPC denotes marginal private cost curve and MSC represents the marginal Social Cost Curve. The market efficient equilibrium in the economy occurs at point Em where Qm is the amount of optimum quantity. However, pollution involves external damage and thus is an example of negative externality in the economy, the MSC curve lies above the MPC curve. and socially optimum amount of quantity occurs at point Es where optimum amount of pollution is close to zero.

Thus, in the above graph of negative externality it can be shown that pollution is so harmful that no pollution should be allowed according to efficiency standard.