Using a Supply and Demand Diagram, Demonstrate How a Negative

question 67

Short Answer

Using a supply and demand diagram, demonstrate how a negative externality leads to market inefficiency. How might the government help to eliminate this inefficiency?

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Definitions:

Profit Maximizes

The process by which a company establishes the price and volume of output that leads to the maximum profit.

Deadweight Loss

The reduction in total surplus that results from a market distortion, such as a tax or subsidy, signaling inefficiencies in allocation of resources.

Socially Optimal Level

A state at which the allocation of resources maximizes social welfare, often where marginal social benefit equals marginal social cost.

Marginal Revenue

Marginal revenue is the additional income received from selling one more unit of a product or service.