Answer to Question #91901 in Microeconomics for tira

Question

A polluting factory is an example of what type of externality? Negative demand-side externality or negative supply-side externality. Explain.

Answer 1

Polluting factory is an example of the negative externality. Since negative externality occurs when the cost to society of a economic agent’s action is greater than the cost to the agent, the market equilibrium will be affected. Since factory needs to consider social costs in the initial price the cover the impact of the negative externality, the price of the product will be higher. So the demand will be lower. The market equilibrium will shift upper-left.