Question

figure 10 - 1
this figure reflects the market for outdoor concerts in a public park surrounded by residential neighbourhoods.
refer to figure 10 - 1. what type of externality is represented in this graph?
a positive consumption externality
a negative production externality
a positive production externality
a negative consumption externality

Explanation:

• Negative production externality: When there is a negative production externality, the social cost of production is higher than the private cost. In the graph, the Social Cost curve is above the Supply (Private Cost) curve. This indicates that for each unit of output (outdoor concert), there is an additional cost imposed on society (like noise disturbance to the residential neighbourhoods around the park).
• Positive consumption/production externality: In case of positive externalities (consumption or production), the social benefit/cost would be different in a way that either the social value (for consumption) is higher (for positive consumption) or social cost is lower (for positive production) than private counterparts, which is not the case here.
• Negative consumption externality: For negative consumption externality, the focus is on the consumption side (e.g., when consumption of a good by one person imposes a cost on others during the consumption process). But here the issue is with the production (putting up the concert) imposing a cost (noise etc.) on the neighbourhood.

Answer:

B. A negative production externality