neighbours’ view and the value of their property. Yet the individual
renovator ignores the benefits that her actions have on the neighbours.
This is a positive externality; social marginal benefits exceed private
marginal benefits. In this case, because the renovator ignores those parts
of social benefits that are not her own private benefits, there will be too
little home renovation done relative to what is allocatively efficient.
The airborne emissions from coal-fired power plants are one important
example of a negative externality. The social costs associated with these
emissions exceed the private costs.
Smileus/Shutterstock
In Figure 16-1 , the and curves show the private and social
marginal costs, respectively. The and curves show the private
and social marginal benefits, respectively. Allocative efficiency requires
that production and consumption take place where social marginal
benefits are equal to social marginal costs: When either
kind of externality is present, the outcome is not allocatively efficient.
MCP MCS
MBP MBSMBS=MCS.