That's how I understand externality graphs

1. Externalities This’s how I understand them…

2. Positive Externalities Example: Education

3. Positive Externalities Here is the graph present cost and benefit of education. Without considering externality, quantity is at Qp. Cost benefit MPC MPB Output Qp

4. Positive Externalities But education bring more benefit to society  Beside private benefit, we have external benefit Cost benefit MPC External Benefit MSB MPB social optimum output Output Qp Qs

5. Positive Externalities Because of the external benefit, marginal social benefit is over marginal private benefit The social quantity demand Qs Qp < Qs  Market Failure Deadweight loss of externality / Welfare loss Cost benefit MPC MSB MPB social optimum output Output Qp Qs

6. Positive Externalities Government can implement subsidy to solve this situation, but how much subsidy?  Cost benefit Deadweight loss of subsidy MPC Subsidy per unit MSB Subsidy paid MPB social optimum output Output Qp Qs

7. Negative Externalities Example: Steel production causes pollution

8. Negative Externalities Here is the graph present cost and benefit of producing steel. Without considering externality, quantity is at Qp. Cost benefit MPC MPB Output Qp

9. Negative Externalities However, producing steel causes more cost to society  Beside private cost, we have external cost Cost benefit MSC MPC External Cost MPB Output Qp

10. Negative Externalities Because of the external cost, marginal social cost is over marginal private cost The social quantity demand Qs Qp > Qs  Market Failure Cost benefit MSC Deadweight loss of externality / Welfare loss MPC MPB social optimum output Output Qp Qs

11. Negative Externalities Government can implement tax to solve this situation, but how much tax?  (Let’s say it’s fixed tax) Cost benefit MSC MPC Tax per unit Tax Revenue Deadweight loss of tax MPB social optimum output Output Qp Qs

12. That’s how I understand externalities graphs… Please help me understand the problem better by answering my questions written in Notes, or send me feedback to my blog www. http://istudyecon.blogspot.com/ Thank you so much for your time

13. Positive Externalities Cost benefit MPC New point External benefit MSB Old point MPB Output Qp Qs

14. Negative Externalities Cost benefit MSC MPC External benefit New point Old point MPB Output Qp Qs

15. Negative Externalities Cost benefit MSC MPC MPB Output Qp Qs