Question

Draw a supply and demand graph for the market for electricity produced by coal. Indicate the market equilibrium. Then, assuming that there's a fixed social cost not borne by the supplier or consumer (externality), draw the social marginal cost curve and indicate the socially optimal (efficient) price and quantity.

Answer 1

This is a negative externality, a negative externality occurs whenever the production or the consumption activity inflicts an adverse effect on the third party. The electricity production by coal pollutes the air and cause to many diseases m, it is clear that the production has negative external effects on the society. When there is a negative externality , the socially efficient output will be less than the private market output.