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April 18, 2014

Homework Help: Microeconomics

Posted by AliceP on Wednesday, November 8, 2006 at 8:04am.

Can you show graphically the presence of externalities for example in the case of research and development expenditures?

Also is this type of externality referred to as the generic case?

thanks....

I dont know what you mean by the "generic case".

However, in general, we graphically show the presence of externalities by drawing two supply curves. First draw your typical supply and demand curves. Here, supply represents the relationship beween price and the quantity suppliers are willing to supply. It also represents the privately borne costs of supplying the particular good. Now draw a second supply curve that adds social costs or subtracts social benefits. (In the case of a positive externalities, the new curve is to the right, in the case of negative externalities (e.g., pollution) the curve is to the left.) The new supply curve now incorporates social costs or benefits.

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