Externalities + market failure

• An externality is a positive or negative consequence of an economic activity experienced by third parties.
• Drawing positive externalities of production - MPC and MSC are different supply lines. MPB = MSB as demand. MSC is to the right of MPC.
• Drawing negative externalities in production - MPC and MSC are supply lines. MPB = MSB are demand. Draw MSC to the left of MPC.
• Drawing negative externalities in consumption - MPB and MSB are demand lines. MPC = MSC. Draw MSB to the left of MPB.
• Drawing positive externalities of consumption. MPB and MSB are demand lines. MPC = MSC. Draw MSB to the right of MPB.