Question

Table 12.12, shows the supply and demand conditions for a firm that will play trumpets on the streets when requested. Q_S1 is the quantity supplied without social costs. Q_S2 is the quantity supplied with social costs. What is the negative externality in this situation? Identify the equilibrium price and quantity when we account only for private costs, and then when we account for social costs. How does accounting for the externality affect the equilibrium price and quantity?

Short answer

The sound of trumpets is a negative externality.

Step-by-step solution

Negative Externalities  

When the manufacture and use of a product has a detrimental impact on a third party.

Concept

The price of a private cost equilibrium is $10, and the quantity is 5. (private cost does not include social cost). The equilibrium price for social cost is $12, and the quantity is 4 (social cost includes private and external costs).

Externalities also incurred additional costs in the form of "external costs," lowering equilibrium quantity and raising equilibrium price.