Micro Foundations · intermediate
What moves on the Externalities & Pigouvian Taxes diagram
Higher demand raises market quantity further above the social optimum, enlarging the deadweight lossdeadweight lossValue that simply vanishes when a market is pushed away from its efficient quantity, trades worth making that don't happen. triangle even though the per-unit external cost is unchanged.
The deadweight lossdeadweight lossValue that simply vanishes when a market is pushed away from its efficient quantity, trades worth making that don't happen. triangle sits between the market quantity and the socially optimal quantity.
Booming export orders lift demand for the polluting good at every price.
Market quantity rises, and the gap to the social optimum widens with it.
More output means more uncosted damage: the same per-unit externalityexternalityA cost or benefit that lands on someone outside the transaction, pollution's harm, vaccination's protection. now applies to many more units.
Examiners ask this as: demand rises, industrial boom, more pollution, market failure grows, overproduction.
Other scenarios on Externalities & Pigouvian Taxes