Micro Foundations · intermediate
What moves on the Externalities & Pigouvian Taxes diagram
Demand shifts move both equilibria; the externalityexternalityA cost or benefit that lands on someone outside the transaction, pollution's harm, vaccination's protection. wedge, and the overproduction, persists at any demand level.
Start at equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change. with the externalityexternalityA cost or benefit that lands on someone outside the transaction, pollution's harm, vaccination's protection. wedge visible.
Demand for the polluting good booms.
Both market and social optimum shift out, but the overproduction gap persists, now at a larger scale of harm.
Examiners ask this as: polluting good demand, externality grows with output.
Other scenarios on Externalities & Pigouvian Taxes