|Posted on April 18, 2014 at 9:35 AM|
A negative externality occurs when the marginal social cost (MSC) is greater than the marginal social benefit (MSB). Society is worse off from the production of the good. There is a misallocation of economic resources and deadweight loss. Markets overproduce goods that generate negative externalities.
The No Bull Review graph below illustrates a good that creates negative externalities (MSC>MSB). The area of deadweight loss (inefficiency) is the purple triangle. P1 and Q1 is socially optimal, however the market generates a price of P and quantity of Q. Society is getting too much of the good at too low of a price.
AP Microeconomics Unit 4 Role of Government