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Market Failure and Government Intervention

Figure 17-4. Social and Private Demand

NOTE:  When there are positive consumption externalities the social demand curve will be above the private market demand curve.

Production externalities abound.  Pollution is a classic case.  If a firm produces pollution in the production of its goods and services then some third party is affected besides the buyer of the goods and services.  Negative production externalities cause the social supply curve to be ABOVE the private supply curve for the good or service.

In the following article can you identify who the third party is who is affected by the buying and selling of oil?

Two years after California became the first state in the nation to pass a law limiting automotive emissions of the gases believed to cause global warming, state regulators are expected to disclose on Monday how they plan to put the law into effect. Their proposal would amount to a reduction of about 30% in automotive emissions of global-warming gases by 2015, said Alan Lloyd, chairman of the California Air Resources Board, the state's clean-air agency.

If approved by the board, the initial proposal from the board's staff would add about $300 to the price of a new car in California between 2009, when the law is set to

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