The scenario
A market with a negative externality, where the social cost of production exceeds the private cost, causing overproduction and deadweight loss.
What is in this drawing
Read the decisions behind it.
01
Model externality as additive disturbance to private supply.
02
Separate private and social market blocks to compare equilibrium quantities.
03
Use sum node to compute deadweight loss from quantity difference.
When illustrating how externalities cause market failure and quantifying welfare loss.
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