Question

figure 5 - 1 shows a market with an externality. the current market equilibrium output of $q_1$ is not the economically efficient output. the economically efficient output is $q_2$. refer to figure 5 - 1. suppose the current market equilibrium output of $q_1$ is not the economically efficient output because of an externality. the economically efficient output is $q_2$. in that case, the diagram shows the effect of a positive externality in the production of a good. the effect of a negative externality in the production of a good. the effect of an external benefit such as a subsidy granted to consumers of a good. the effect of an external cost imposed on a producer.

Explanation:

• A negative externality occurs when the production or consumption of a good causes an external cost to a third - party. In the case of a negative externality in production, the private cost of production is less than the social cost of production.
• The market equilibrium output \(Q_1\) is determined by the intersection of the demand curve (private benefit) and the supply curve (private cost). The economically efficient output \(Q_2\) is determined by the intersection of the demand curve (private benefit) and the social cost curve (private cost + external cost). Since \(Q_1>Q_2\), it implies that the market is over - producing due to the presence of an external cost (negative externality in production).
• A positive externality would lead to under - production (\(Q_1 < Q_2\)). An external benefit (like a subsidy) is related to positive externalities. An external cost imposed on a producer is part of the concept of negative externality in production, but the overall description of the market over - producing due to negative externality in production is more comprehensive.

Answer:

the effect of a negative externality in the production of a good.