Micro Foundations · intro
What moves on the Externalities & Pigouvian Taxes diagram
Abatement technology reduces the marginal external cost per unit, moving the marginal social cost curve toward private supply and shrinking the welfare loss from overproduction.
The gap between private supply and marginal social cost is the external cost imposed on everyone else.
The industry adopts filtration technology that cuts emissions per unit sharply.
The MSC curve falls toward the private supply curve: the wedge narrows.
The socially optimal quantity moves closer to the market quantity, so the deadweight lossdeadweight lossValue that simply vanishes when a market is pushed away from its efficient quantity, trades worth making that don't happen. from overproduction shrinks.
Examiners ask this as: clean technology, less pollution, external cost falls, scrubbers, renewable.
Other scenarios on Externalities & Pigouvian Taxes