When External Costs Are Significant, Output Is Too High
Panel A: The market equilibrium is found, as usual, where the supply and demand curves intersect. The market equilibrium maximizes consumer plus producer surplus.
Panel B: We add external costs to the supply curve to find the social cost curve. Notice that the social cost of the QMarket unit exceeds the private value of this unit. The efficient equilibrium is found where the social cost and demand curves intersect. QEfficient is less than QMarket so the market overproduces goods with significant external costs.
Panel A: The market equilibrium is found, as usual, where the supply and demand curves intersect. The market equilibrium maximizes consumer plus producer surplus.
Panel B: We add external costs to the supply curve to find the social cost curve. Notice that the social cost of the QMarket unit exceeds the private value of this unit. The efficient equilibrium is found where the social cost and demand curves intersect. QEfficient is less than QMarket so the market overproduces goods with significant external costs.