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Pollution as a negative externality

Pollution is a negative externality. Economists illustrate the social costs    of production with a demand and supply diagram. The social costs include the private costs of production incurred by the company and the external costs of pollution that are passed on to society. [link] shows the demand and supply for manufacturing refrigerators. The demand curve (D) shows the quantity demanded at each price. The supply curve (S private ) shows the quantity of refrigerators supplied by all the firms at each price if they are taking only their private costs into account and they are allowed to emit pollution at zero cost. The market equilibrium (E 0 ), where quantity supplied and quantity demanded are equal, is at a price of $650 and a quantity of 45,000. This information is also reflected in the first three columns of [link] .

Taking social costs into account: a supply shift

The graph shows how equilibrium changes based on whether a firm focuses on its own costs or social costs.
If the firm takes only its own costs of production into account, then its supply curve will be S private , and the market equilibrium will occur at E 0 . Accounting for additional external costs of $100 for every unit produced, the firm’s supply curve will be S social . The new equilibrium will occur at E 1 .
A supply shift caused by pollution costs
Price Quantity Demanded Quantity Supplied before Considering Pollution Cost Quantity Supplied after Considering Pollution Cost
$600 50,000 40,000 30,000
$650 45,000 45,000 35,000
$700 40,000 50,000 40,000
$750 35,000 55,000 45,000
$800 30,000 60,000 50,000
$850 25,000 65,000 55,000
$900 20,000 70,000 60,000

However, as a by-product of the metals, plastics, chemicals and energy that are used in manufacturing refrigerators, some pollution is created. Let’s say that, if these pollutants were emitted into the air and water, they would create costs of $100 per refrigerator produced. These costs might occur because of injuries to human health, property values, wildlife habitat, reduction of recreation possibilities, or because of other negative impacts. In a market with no anti-pollution restrictions, firms can dispose of certain wastes absolutely free. Now imagine that firms which produce refrigerators must factor in these external costs of pollution—that is, the firms have to consider not only the costs of labor and materials needed to make a refrigerator, but also the broader costs to society of injuries to health and other values caused by pollution. If the firm is required to pay $100 for the additional external costs of pollution each time it produces a refrigerator, production becomes more costly and the entire supply curve shifts up by $100.

As illustrated in the fourth column of [link] and in [link] , the firm will need to receive a price of $700 per refrigerator and produce a quantity of 40,000—and the firm’s new supply curve will be S social . The new equilibrium will occur at E 1 , taking the additional external costs of pollution into account results in a higher price, a lower quantity of production, and a lower quantity of pollution. The following Work It Out feature will walk you through an example, this time with musical accompaniment.

Questions & Answers

current economic plans (MDGS) needs
Ajijola Reply
I don't know what is happening
surajkumar
What is economic
Joeali Reply
What is the importance of study economics
Wilma
Economic is the study of how humans make decisions in face of sacristy
Wilma
economics is the study of how humans makes decision in the face of scarcity
Kpienta
economics is the study of human behaviour when faced with difficult situation example when goods and services are scarcity.
Sydney
what is Economic
Dauda Reply
what is 4ps of economic?
thomas Reply
production place Price product
Benedict
Criticism of elasticity
Siddikur Reply
what is unemployment
Gyamfi Reply
ohk thanks
Gyamfi
why is unemployment rapid in the country
Gyamfi
I need more explanation
Odo
what is unemployment
Munanag Reply
not working
Bethel
some one who is willing qualified to work but can't find job
jackie
Bethel...explain? please
Abubakar
some one who is willing to work but can't find job
Hawa
Yes true
Brian
which one please
Hawa
unemployment refers to the ability for someone who is capable and willing to work but could not find a job..
Mnoko
some one who not able to find a job
Dennis
please what is the secret of learning?
thomas
What is stock market?
JOHN Reply
explain the various types of cost curve
Ruth Reply
Short-run average fixed cost (SRAFC) Short-run average total cost (SRAC or SRATC) Short-run average variable cost (AVC or SRAVC) Short-run fixed cost (FC or SRFC) Short-run marginal cost (SRMC) Short-run total cost (SRTC)
Romy
what's economic development and growth
Popoola Reply
what do you understand by Ceteris Paribus?
Gabriel Reply
the external factor will remained constant, except the price
Hasib
everything being equal
Chenwi
explain the uses of microeconomics
Nikita Reply
uses of microeconomics
Nikita
Adam Smith's definition of economics
Sylvia Reply
what is economic deficit
Amjad
this is a situation whereby a nation's outcome or available resources are not enough to the people thereby causing scarcity
Ariel
prices of Quality demanded is equal to Quality supplied
NABUBOLO Reply
it's quantity demand and quantity supplied that's called equilibrium
Romy
no
NABUBOLO
they deal With prices
NABUBOLO
define the elasticity
NABUBOLO
explain different types of elasticity
NABUBOLO
oops 😬 you are right you talk about quality I tell about quantity
Romy
elasticity is the measurement of the percentage change of one economic variable in response to a change in another
Romy
Cross Elasticity of Demand (XED) Income Elasticity of Demand (YED) Price Elasticity of Supply (PES)
Romy
anything else?
Romy
I need to know everything about theory of consumer behavior
Grace
Romy, what is microeconomic?
thomas
What is Economic please
Dauda
Thomas, microeconomics is the study of how consumers, workers, and firms interact to generate outcomes in specific markets
Kieran
Dauda, economics is the study of people and choices. it is on one side the study of wealth and on the more important side, a part of the study if man
Kieran
How does one analyze a market where both demand and supply shift?
Gabriel Reply
That's equilibrium market
Ramon
but an equlibrum can appear twice on the same market... both in Movement along the Demand/supply curve of shift in the Curve
Gabriel
I Mean on the same curve..
Gabriel
how can consumer surplus be calculated
Franklyn

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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