Question

What is the specific reason that accounting for externalities and thereby shifting the market supply curve causes the equilibrium quantity of Good X to decline from Q1 to Q2?

Short answer

The lower the amount, the lower will be the contamination. Accordingly, when the cost of a negative externality is thought about the socially ideal amount is lower than the confidential ideal.

Step-by-step solution

Introduction

A confidential firm will create where the marginal cost is equivalent to the marginal advantage. This is given by the crossing point of the demand (marginal advantage) curve and the supply (marginal cost) curves.

Explanation

The confidential ideal degree of Good X is $Q_1$and the confidential ideal cost is $P_1$However, since creation accompanies a negative externality as contamination, the cost of this should be added to the confidential cost to show up at the social cost. Once, the cost of the externality is added to the confidential cost the supply curve or the marginal cost curve of the firm moves up to one side to $S_2$The new harmony happens at point $E_2$The net impact of including the externality to the cost of the firm is a lower amount of Good X and a more exorbitant cost of Good X.