Essay --

The first model above demonstrates the negative production externality that is caused by factories that emit carbon pollution. A negative production externality occurs when the production or creation of a product results in negative spillover costs to society. In this case, it is the whole world’s population that is experiencing these negative spillover costs, as the carbon being emitted into the atmosphere from factories’ production of goods leads to global warming issues. Third parties (people who had no involvement in the transaction) are suffering as the environment surrounding them is being destroyed by carbon emissions from corporations. This can be seen above in the first model, as the market is producing where MSB (benefit of society) and MPC (private cost) meets, thus leading to a market failure and high external costs for society. Here, MSC (cost to society) is greater than the MPC. This results in a welfare loss, as the product is being overproduced and MSB ( benefit of society) is not equal to MSC and maximum utility as well as allocative efficiency are not reached. Theref...