What is a negative externality? Construct a graph for the market for Steel showing
the market price and quantity when the firms are dumping their industrial waste in
the local waterways. What is the motivation for firms to pollute the local waterways?
Explain how third parties are adversely affected from the pollution and how the
negative externality can be internalized. Draw into the graph the appropriate shift of
the supply curve which will remedy the negative externality and bring about the
socially optimal level of output.
What is a positive externality? Construct a graph for the market for vaccine shots
showing the market price and quantity.
Explain how third parties are benefiting from those who consume vaccine shots and
how the positive externality can be internalized. Draw into the graph the appropriate
shift of the demand curve which will remedy the positive externality.
