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Example of negative externality

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Disposing of coffee pods is an example of negative externality. Left unregulated the equilibrium price is $5 and quantity is 5.

The efficient price is $6 and the efficient quantity is 4.

  • Why is the efficient price higher than the equilibrium price and why is the efficient quantity lower than equilibrium quantity?

Suppose the government imposed a $2 tax. This would make equilibrium price $6 and equilibrium quantity 4. There is deadweight loss and surplus

  • Discuss what mechanisms can be used to make the market efficient?

Reference no: EM132274968

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