Externalities Of Production Case Study

SMC is the social marginal cost curve which intersects the demand curve D at point E1 and determines the social optimum output level OQ1 at price OP1. Since for every unit of output between OQ and OQ1 social marginal cost (ОР1) is less than the competitive market price OP, its production involves a net social gain equal to QQ1.

Negative Externalities of Production: When the production of a commodity or service by a firm affects adversely other firms in the industry, social marginal cost is higher than social marginal benefit. Suppose, a factory situated in a residential area emits smoke which affects adversely health and household articles of the residents. In this case, the factory benefits at the expense of residents who have to incur extra expenses to keep themselves healthy and their households clean. These are social marginal costs because of harmful externalities

External economies of consumption arise from non-market interdependences of the satisfactions enjoyed by different consumers. An increase in the consumption of a good or service which affects favourably the consumption patterns and desires of other consumers is an external economy of consumption. When an individual installs a TV set, the satisfaction of his neighbours increases because they can watch TV programmes free at his place. Here social benefit is larger and social cost is lower than the private benefit and cost. But the TV owner is likely to use his TV set to a smaller extent than the interests of society require because of the inconvenience and nuisance caused by his neighbours to him.

Negative Externalities in