Lecture Notes: Drawing Externalities in Economics

Introduction to Externalities

• Externalities occur when the free market ignores external costs or benefits.
  • Negative Externality: External costs, e.g., smoking.
  • Positive Externality: External benefits, e.g., bees pollinating flowers.
• Types of Externalities:
  • Consumption Externality
  • Production Externality

Types of Externalities

1. Negative Externalities
   • Consumption: e.g., smoking affects others' health.
   • Production: Not discussed in detail but involves production processes harming others.
2. Positive Externalities
   • Production: e.g., honey production benefits other plants through pollination.
   • Consumption: Not discussed in detail but involves consumption providing benefits to others.

Correct Graphing of Externalities

• Negative Production Externality:
  • Two cost curves: marginal private cost, marginal social cost.
  • Quantity to the left is optimal; right is the free market (overproduction).
• Negative Consumption Externality:
  • Two benefit curves: marginal private benefit, marginal social benefit.
  • Quantity to the right is the free market; left is optimal (overconsumption).
• Positive Production Externality:
  • Two cost curves: marginal private cost, marginal social cost.
  • Quantity to the left is the free market; right is optimal (underproduction).
• Positive Consumption Externality:
  • Two benefit curves: marginal private benefit, marginal social benefit.
  • Quantity to the left is the free market; right is optimal (underconsumption).

Rules for Graphing Externalities

1. Rule 1:
   • Production externality: two cost curves.
   • Consumption externality: two benefit curves.
2. Rule 2:
   • Negative externality: overproduction.
   • Positive externality: underproduction.
3. Rule 3:
   • Deadweight loss points to socially optimal.
   • Positive: points right.
   • Negative: points left.

Practice and Application

• Analyze given graphs to identify externality type and side (consumption/production).
• Use the three rules to guide identification.

Conclusion

• Practice with provided study guides and graphing exercises.
• Refer to additional resources for more in-depth learning.

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Remember these key rules and practice drawing the graphs to master externalities in economics. Check out the study guides for further practice!