Interactive Externalities Diagram

Model negative and positive externalities, welfare loss triangles, and Pigouvian taxes and subsidies. Supports Edexcel (2 types) and AQA (4 types).

Diagram:Supply & Demand AD/AS PPF Monopoly Perfect Competition Externalities Phillips Curve Trade & Tariffs Natural Monopoly Economy Dashboard MONIAC Domino Chains

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Exam board:

Externality size

External cost per unit (£)£25

Demand (MPB)

Demand level (MPB intercept)100

Supply (MPC)

Supply level (MPC intercept)20

Producers impose costs on third parties (e.g. pollution from a factory). The social cost (MSC) exceeds the private cost (MPC). The free market overproduces at Qp — the socially optimal output is Qs where MSC = MPB. A Pigouvian tax equal to the external cost closes the gap.

Qp = 50.0 (private market) vs Qs = 38.1 (socially optimal). Welfare loss ≈ 148.8 (area of triangle).

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