Negative Externalities and ProductionLivestock production generates external costs, so the marginal social cost curve, MSC, of livestock, corresponds to the supply curve, S, shifted upward by the marginal external cost. Panel (a) shows that without government action, the market produces the quantity Q_MKT. That market quantity is greater than the socially optimal quantity of livestock production, Q_OPT, at which MSC crosses the demand curve, D. At Q_MKT, the market price, P_MKT, is less than P_MSC, the true marginal cost to society of livestock production. The yellow deadweight loss area represents society’s net losses from producing Q_OPT rather than Q_MKT. Panel (b) shows how an optimal Pigouvian tax on livestock production, equal to its marginal external cost, moves the production to Q_OPT by raising the price paid by consumers to P_OPT and lowering the price received by producers to P_PRD.