<< Chapter < Page Chapter >> Page >

Identifying the equilibrium price and quantity

[link] shows the supply and demand conditions for a firm that will play trumpets on the streets when requested. Output is measured as the number of songs played.

Supply and demand conditions for a trumpet-playing firm
Price Quantity Demanded Quantity Supplied without paying the costs of the externality Quantity Supplied after paying the costs of the externality
$20 0 10 8
$18 1 9 7
$15 2.5 7.5 5.5
$12 4 6 4
$10 5 5 3
$5 7.5 2.5 0.5

Step 1. Determine the negative externality in this situation. To do this, you must think about the situation described and consider all parties that might be impacted. A negative externality might be the increase in noise pollution in the area where the firm is playing.

Step 2. Identify the equilibrium price and quantity when only private costs are taken into account, and then when social costs are taken into account. Remember that equilibrium is where the quantity demanded is equal to the quantity supplied.

Step 3. Look down the columns to where the quantity demanded (the second column) is equal to the “quantity supplied without paying the costs of the externality” (the third column). Then refer to the first column of that row to determine the equilibrium price. In this case, the equilibrium price and quantity when only private costs are taken into account would be at a price of $10 and a quantity of five.

Step 4. Identify the equilibrium price and quantity when the additional external costs are taken into account. Look down the columns of quantity demanded (the second column) and the “quantity supplied after paying the costs of the externality” (the fourth column) then refer to the first column of that row to determine the equilibrium price. In this case, the equilibrium will be at a price of $12 and a quantity of four.

Step 5. Consider how taking the externality into account affects the equilibrium price and quantity. Do this by comparing the two equilibrium situations. If the firm is forced to pay its additional external costs, then production of trumpet songs becomes more costly, and the supply curve will shift up.

Remember that the supply curve is based on choices about production that firms make while looking at their marginal costs, while the demand curve is based on the benefits that individuals perceive while maximizing utility. If no externalities existed, private costs would be the same as the costs to society as a whole, and private benefits would be the same as the benefits to society as a whole. Thus, if no externalities existed, the interaction of demand and supply will coordinate social costs and benefits.

However, when the externality of pollution exists, the supply curve no longer represents all social costs. Because externalities represent a case where markets no longer consider all social costs, but only some of them, economists commonly refer to externalities as an example of market failure    . When there is market failure, the private market fails to achieve efficient output, because either firms do not account for all costs incurred in the production of output and/or consumers do not account for all benefits obtained (a positive externality). In the case of pollution, at the market output, social costs of production exceed social benefits to consumers, and the market produces too much of the product.

Questions & Answers

how to identify a perfect market graph
Adeola Reply
what is the effect of scarce resources on producers
Phindu Reply
what is economic
Charles Reply
what are the type of economic
macroeconomics,microeconomics,positive economics and negative economics
what are the factors of production
process of production
Basically factors of production are four (4) namely: 1. Entrepreneur 2. Capital 3. Labour and; 4. Land but there has been a new argument to include an addition one to the the numbers to 5 which is "Technology"
what is land as a factor of production
what is Economic
economics is how individuals bussiness and governments make the best decisions to get what they want and how these choices interact in the market
Economics as a social science, which studies human behaviour as a relationship between ends and scarce means, which have alternative uses.
how will a country's population be equal to it's labour force
Hope Reply
what is the meaning of ppf
Obeng Reply
Production Possibility Frontier
What is Economic
Governor Reply
Economics is the social science that deals with the unlimited human wants in the face of scarce (limited in supply) resources.
what is market
Gift Reply
marker is the interaction of buying and selling
market refers to the interaction of the processes of buying and selling of commodities between the buyer and the seller.
market is a place where two parties gather to facilitate exchange of goods and services.
what are some good sources of information to find trends in various Industries
how do on know that marketing is going on
what is consumption
Using revenue
What is stock market
What are the marmet function
Odirile Reply
price elasticity of demand is the degree of responsiveness of a quantity demanded to the change in price of the commodity in question.
Gladys Reply
What does elasticity mean
Elasticity means change in demand with the change in price. It is elastic if the demand changes with the price change whereas it is inelastic if the demand is not affected due to change in price
I have a question
what is the importance of learning economics?
Thelma Reply
it helps to make the correct choice
it helps firm to produce products that will bring more profit
the difference between needs and wants
londiwe Reply
needs are things that we basically can't live without wants are just luxury things
needs are things without them we can't live but want are things without we can live
what is education
it's a process in which we give or receiving methodical instructions
what is mixed economy
what is a deadweight loss? how monopoly creates a deadweight loss?
Ashraf Reply
who are u?
what it this
hi y'all
how does group chat help y'all 🤔
hi y'all
how does group chat help y'all 🤔
how does group chat help y'all 🤔
to learn from one another
oh okay
what is type of economic
taiwo Reply
how to understand basics of economics
Aarif Reply
what is demand schedle
Princess Reply
When you make a Scedule of the demand you made

Get the best Principles of economics course in your pocket!

Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?