Answer to Question #63567 in Economics of Enterprise for Heather

Question

3. Pollution is considered by most a negative externality. Some economists would like to see the costs of these burdens incorporated into the price of goods that we buy. For instance, since coal-fired power plants increase emissions that could potentially lead to climate change, these economists believe that the price we pay for electricity is not high enough.

a.) Draw a completely labeled graph and illustrate on the graph how much higher electricity prices would be if the full costs of electricity production were taken into account. You do not need to provide actual numbers; rather, show on the price axis where the price would be before the externality is considered and where the price would be after the externality is considered.

Answer 1

a) If the full costs of electricity production were taken into account, the electricity production supply curve would shift to the left, as the real cost of production increased.
The price before the externality is considered would be lower than after the externality is considered, because the costs of production increased and the amount of output sold would decrease.