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Homework answers / question archive / What divergences arise between equilibrium output and efficient output when spillover benefits and costs are present? Provide some "real-life" occurrences where both a positive and negative externality took place
What divergences arise between equilibrium output and efficient output when spillover benefits and costs are present? Provide some "real-life" occurrences where both a positive and negative externality took place. What was the role of outside market forces in these situations?
When spillover benefits occur, the equilibrium output will be less than the efficient
output because the consumer is willing to pay a price equal to the consumer's individual marginal benefit, but no more.
When spillover costs are present, the equilibrium output will be more than the efficient output. This is because the producer, who is not bearing the full cost of production, will be able to produce more at a lower price than at the efficient level, which would exist if true costs were reflected in the production decision.
Examples of spillover costs include secondhand smoke, water pollution, and traffic congestion. Spillover benefits include pleasant music, the cure for a common disease, and attractive landscaping. The market encourages the production of spillover costs, because they are not borne by the producers, but sometimes benefit them.