econ

3. Distinguish between private markets and social markets. Include in this discussion why including all the costs — external and private — is important for society. Give an example of an external cost and an external benefit.

The private market is the market for goods which are easily available in the market and so individuals sell or purchase in the market. In other words, the private market is for those goods having a price for that good like milk, bread and other goods for which consumers pay certain money for that good. The social market is the market for goods having no price tag or difficult to measure price for that good, few suppliers of that particular good and no way or difficult way to measure performance. The social cost is the sum of both private cost and external cost, where private cost is the market price of the good and external cost is the hidden cost which occurred due to the externality. If there is negative externality then social cost is greater than the private cost and if positive externality is present then the social cost is less than the private cost or there is the social benefit to society. A case of negative externality is showing below where social cost is greater than the private cost. An example of external cost is like water pollution produced and dump in water by steel industry or chemical industry which reduces their cost but increases cost for fishery industry. Here the quantity of pollution produced is the external cost for society because it negatively affects society as a whole. An example of an external benefit is like planting more trees because it provides fresh air for people or society. Another example for external benefits like as in above steel industry or chemical industry uses technology for reducing pollution it reduces pollution emission and so it benefits society

2. Does the market overproduce or underproduce when third parties are exposed to negative externalities? Show your answer on a supply and demand graph.

When third parties are exposed to negative externalities then social cost of production is greater than the private cost of production. Following shows the market for a good with negative externality - The above figure shows that marginal social cost curve (MSC) is on the left of the marginal private cost curve (MPC). This indicates that MSC curve takes into account the negative externality while MPC does not take into account the negative externality. The market quantity is Q (quantity corresponding to intersection of MPC and MPB curve) while socially optimal quantity is Q1 (quantity corresponding to intersection of MSC and MPB curve). Market quantity, Q, is greater than the socially optimal quantity, Q1. Thus, the market overproduce when third parties are exposed to negative externality.

Does the market overproduce or underproduce when third parties enjoy positive externalities? Show your answer on a supply and demand graph.

market under produce when third part enjoy positive externality .Positive externality is a situation when a third part gets a benefit by the economic activity of others in which third party is not involved . At e1 equilibrium Q1 quantity is and there is a under production due to positive externality and at e2 equilibrium Q2 quantity is produced which an efficient market condition