An externality example
Suppose demand for hogs is $Q_d = 300 - 2.5p$ and the private supply curve for hogs is $Q_s = -117+1.67p$. However, raising hogs has a negative externality in the form of unpleasant odors for downwind homes. This externality has a constant marginal cost of $5, in dollar terms.
- What is the price and quantity the market arrives at on it's own?
- What is the socially optimal quantity?
- What is the deadweight loss associated with the market operating on it's own?
Try this for yourself, then watch the following video for a walk-through.
Did you feel like any of the videos above were confusing, or could use more detail? If you're a student at Iowa State University, send me a quick note at firstname.lastname@example.org, referencing the video number and your issue, if applicable.