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Chapter 31: Q.11 (page 708)

Why does "including externalities" cause the supply curve S2 to lie above the supply curve S1 that has been drawn "excluding externalities"?

Short Answer

Expert verified
  • When external expenses are recognized, the variable costs of the firm increase by the amount of the outside cost.
  • In this manner, the provided quantity moves up on side to S1.

Step by step solution

01

Introduction

  • A cost or advantage incurred by a manufacturer that is not borne or acquired monetarily by that creator is known as an externality.
  • Spillovers can be beneficial or destructive, and they can occur during the manufacturing or use of a service or product.
02

Explanation

  • The firm's supply curve is given by S1 before the externality.
  • The supply curve S1 represents the firm's marginal secret cost of delivering Good X.
  • Regardless, there is an externality to creation.
  • When the cost of this externality is considered and added to the maker's confidential cost, the marginal cost of Good X increases.
  • S2 is the net social cost, while S1 is the marginal benefits price.
  • The Social Marginal Cost is equal to the sum of the Private Marginal Cost and the External Cost.
  • As a result, when the externality is considered, the firm's marginal cost increases by the amount of the outer cost.
  • As a result, the supply curve changes up to S2 on one side.

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