Micro Foundations · intro
What moves on the Externalities & Pigouvian Taxes diagram
A larger marginal external cost per unit raises the marginal social cost curve, widening the gap from private supply and increasing the deadweight lossdeadweight lossValue that simply vanishes when a market is pushed away from its efficient quantity, trades worth making that don't happen. of overproduction.
Private supply reflects only what producers pay; MSC adds the damage borne by third parties.
The firm switches to a cheaper, dirtier input that doubles emissions per unit.
MSC rises away from private supply: the external cost wedge widens.
The market keeps producing where private cost meets demand, so overproduction and deadweight lossdeadweight lossValue that simply vanishes when a market is pushed away from its efficient quantity, trades worth making that don't happen. both get bigger.
Examiners ask this as: pollution worse, coal, emissions rise, external cost rises, dirty production.
Other scenarios on Externalities & Pigouvian Taxes