Supply and Demand Diagram
The usual economic analysis of externalities can be illustrated using a standard supply and demand diagram if the externality can be valued in terms of money. An extra supply or demand curve is added, as in the diagrams below. One of the curves is the private cost that consumers pay as individuals for additional quantities of the good, which in competitive markets, is the marginal private cost. The other curve is the true cost that society as a whole pays for production and consumption of increased production the good, or the marginal social cost.
Similarly there might be two curves for the demand or benefit of the good. The social demand curve would reflect the benefit to society as a whole, while the normal demand curve reflects the benefit to consumers as individuals and is reflected as effective demand in the market.
Read more about this topic: Externality
Famous quotes containing the words supply, demand and/or diagram:
“The job of the press is to encourage debate, not to supply the public with information.”
—Christopher Lasch (b. 1932)
“The health of the eye seems to demand a horizon. We are never tired, so long as we can see far enough.”
—Ralph Waldo Emerson (1803–1882)
“If a fish is the movement of water embodied, given shape, then cat is a diagram and pattern of subtle air.”
—Doris Lessing (b. 1919)