Micro Foundations · intermediate
What moves on the Externalities & Pigouvian Taxes diagram
Larger external costs widen the gap between market output and the social optimum, and the market alone never responds.
Start with a modest externalityexternalityA cost or benefit that lands on someone outside the transaction, pollution's harm, vaccination's protection. wedge.
New research shows each unit does more harm. MSC shifts further above supply.
The market equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change. doesn't move at all. That's the failure: private choices ignore the growing social gap.
Examiners ask this as: external cost rises, damage larger, science reveals harm.
Other scenarios on Externalities & Pigouvian Taxes