Question

Refer to Table 12.2. The externality created by the refrigerator production was \(100. However, once we accounted for both the private and additional external costs, the market price increased by only \)50. If the external costs were \(100 why did the price only increase by \)50 when we accounted for all costs?

Short answer

The producer gets $50 less & the consumer pays $50 extra.

Step-by-step solution

Step 1. Private cost

Supplying costs of goods and services are called as private cost.

An additional external cost is a cost imposed by a consumer or producer on another consumer or producer outside of the exchange as a result of an economic activity.

Step 2. Content Explanation 

After taking into account both costs, Following that, raising the price by $100 can significantly dampen demand.

As a result, the manufacturer splits the externality cost with the consumer and raises the price by $50.

Furthermore, the manufacturer receives $50 less and the customer spends $50 more.