Why negative externalities are likely to result in over-production and positive externalities in under-production
When a producer or consumer ignores costs they impose on others, they produce or consume too much. When they ignore benefits they create for others, they produce or consume too little.
Formula
Welfare loss = ½ × (Q_market − Q_optimal) × (MSC − MPC) at Q_market
Real World
UK steel producers who discharge waste into rivers face no charge for that pollution, so they produce beyond the socially optimal output — output where the true cost to society exceeds the price paid.
Exam Focus
In 'evaluate' questions, show the deadweight welfare loss triangle on your diagram and state that the market output diverges from the socially optimal output.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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