Negative Externality
A negative externality occurs when production or consumption imposes uncompensated costs on third parties. The social cost exceeds the private cost because external costs are not borne by the person creating them. This causes overproduction from society's perspective.
Real World
The Volkswagen diesel emissions scandal revealed that VW cars emitted up to 40 times the legal nitrogen oxide limit, imposing health costs on communities that were never reflected in the price of VW vehicles.
Exam Focus
On diagrams, clearly label MSC above MPC and shade the welfare loss triangle; always identify who the third party bearing the cost is.
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