<p>I'm answering this from first principles as I also haven't been able to find a source illustrating the case of negative externalities in both production and consumption.</p>
<p>The price-quantity diagram needs 4 curves, marginal private cost (= supply) intersecting marginal private benefit (= demand) at the market equilibrium with quantity <span class="math-container">$Q_e$</span>, and marginal social cost intersecting marginal social benefit at the social optimum with quantity <span class="math-container">$Q_{opt}$</span>:
<a href="https://i.sstatic.net/pJngn.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/pJngn.png" alt="enter image description here" /></a></p>
<p>To identify the welfare loss we need to consider the status of the various labelled areas.</p>
<ul>
<li>Areas A,B,C,D,E,F are between the MPB and MPC curves, so form the private surplus, that is, the combined consumer surplus and producer surplus.</li>
<li>Areas C,E,F,G are between the MPC and MSC curves, so represent the social loss due to the negative production externality.</li>
<li>Areas A,D,F,H are between the MSB and MPB curves, so represent the social loss due to the negative consumption externality.</li>
</ul>
<p>Note that area F represents a double social loss.</p>
<p>The net social surplus at the market equilibrium is therefore (A + B + C + D + E + F) - (C + E + F + G) - (A + D + F + H) = B - F - G - H.  But at the social optimum, the net social surplus is B, the area between the MSB and MSC curves.</p>
<p>Therefore the welfare loss due to the externalities is the net social surplus at the welfare optimum less the net social surplus at the market equilibrium which is B - (B - F - G - H) = <strong>F + G + H</strong>, the shaded area.</p>
<p>The diagram also shows the total negative externality per unit, on the assumption that, as shown, the private and social curves are parallel on both the cost and benefit sides (if they are not parallel, then total negative externality per unit will be different at different quantities).</p>

CC BY-SA 4.0
2022-02-14T00:18:42.923Z
This is by far the clearest answer I've received, thank you.
aayush
CC BY-SA 4.0
2022-02-12T20:32:48.663Z
2022-02-12T23:37:05.883Z
2022-02-12T23:37:05.883Z
Adam Bailey
<p>Negative consumption externality shifts demand to the right (compared to counterfactual with no externality) because it means that people do not pay full cost of the consumption.</p>
<p>Negative production externality shifts supply to the right (compared to counterfactual with no externality) because it means producers do not need to pay for all extra costs they create for society.</p>
<p>Hence both happening at the same time will look something like the picture below:</p>
<p><a href="https://i.sstatic.net/uROS9.jpg" rel="nofollow noreferrer"><img src="https://i.sstatic.net/uROS9.jpg" alt="enter image description here" /></a></p>

CC BY-SA 4.0
2022-02-06T15:50:50.893Z
"*Negative consumption externality shifts demand to the right*" demand does not really shift, the curve showing marginal social benefits is a shifted version of the demand curve. Same with supply.
Giskard
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2022-02-06T16:01:36.563Z
@Giskard I meant comparing to hypothetical counterfactual reality where externality does not exist. If you could turn on/off externality like flicking switch it would shift demand because negative consumption externality for example makes people consume more at any price compared to the case where somehow that externality is priced by market (like hypothetical where there are private rights to air). Btw that’s identical to comparing it to marginal social benefit because if there is no externality MSB=MPB and same for supply
1muflon1
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2022-02-06T16:36:45.470Z
"*If you could turn on/off externality like flicking switch it would shift demand*", this is not generally true. In fact, it is usually not true.
Giskard
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2022-02-06T16:37:29.043Z
"*for example makes people consume more at any price compared to the case where somehow that externality is priced by market*" Yes, if you compare it to this **special** case/conterfactual, you are right, but you don't seem to mention that the externality is priced in by the market in your answer. Externalities are usually **not** priced in by the market, so this is an (unrealistic) assumption that should be stated explicitly. Or you can just rephrase your claim.
Giskard
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2022-02-06T16:53:36.147Z
@Giskard i am not sure if I understand. I labeled the D&S lines as D and S with no externality (that is counterfactual world where externality does not exist) - pricing in was just an example but note if externality is priced in by market then it ceases to be externality - since by definition externalities are third party effects not captured by market price (at least by definition in MWG and regular textbooks). We can make a thought experiment where we imagine a world where CO2 does not have effect on global warming as well. Also, I honestly don’t understand your objection to my phrasing.
1muflon1
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2022-02-06T16:54:42.577Z
In virtually any discussion of policy in policy economics you compare policy to some counterfactual that is not necessarily realistic. For example, having no minimum wage might not be realistic given political situation but I don’t see anything wrong with drawing a graph piloting situation with no minimum wage even if it’s unrealistic counterfactual and compare it to situation to minimum wage. Or having 100% income tax might not be realistic but interesting counterfactual to ponder over.
1muflon1
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2022-02-06T17:21:57.293Z
This is odd; perhaps I am the one who misunderstands something. Thought experiment: you have a demand function for tea (or coffee or some drink). Now imagine that, unbeknownst to you, the company producing it changes a part of the manufacturing process and this yields $1/drink sold worth of benefit to the people living close to the factory. Not to the producers, nor to you, you and other consumers don't even know about it. Does your demand for this drink shift because of this externality? If yes, why? If not, what did you mean by "*externality shifts demand*"?
Giskard
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2022-02-06T17:26:51.820Z
@Giskard but that’s different thought experiment with externality to producer. In your case supply would shift because producers would be willing to produce more at any price than before and the benefit is not reflected in price. I mean this is the same as taxation where we talk about demand shifts. For example suppose we have no negative externality because it’s somehow possible to have property rights to clean air. Also let’s focus on demand only so assume externality is only on consumption side - you drive truck u create externality but assume production is clean. Now in this case if
1muflon1
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2022-02-06T17:28:00.737Z
You are right, the externality is at the supply side. But why is "*producers would be willing to produce more*" true?
Giskard
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2022-02-06T17:28:44.143Z
It is **not** the same as taxation - there you do feel the effect, unlike with an externality, where someone else feels the effect!
Giskard
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2022-02-06T17:28:55.247Z
Property rights to clean air are removed suddenly consumers don’t need to buy clean right when they drive (if there would be property rights they would have to like with pollution permits) now that they don’t have to pay for that regardless of what the price on the market is the demand will shift to the right along the whole demand curve because the complement (clean air consumption) got free.
1muflon1
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2022-02-06T17:29:44.883Z
Can we please stick to my simple example where externalities are not priced in, nor is there a market for free air? Your examples are a bit too convoluted for me.
Giskard
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2022-02-06T17:30:48.687Z
@Giskard but you do feel effect - not the external effect but the effect of not having to pay for that external effect. And this is like a tax, that’s why taxes solve externalities… if it would not be like a tax Pigovian taxes would be impossible I hope you are not suggesting that
1muflon1
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2022-02-06T17:31:41.453Z
So, w.r.t. my example, what [do you mean](https://economics.stackexchange.com/questions/50324/what-does-the-price-quantity-diagram-of-a-good-with-both-negative-production-and/50326?noredirect=1#comment81080_50326) by "*producers would be willing to produce more*"? Can you please explain without going to a different scenario/theory.
Giskard
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2022-02-06T17:33:40.527Z
@Giskard ok we can stick to your example but your example is not the example that pertains to the question asked by OP since it’s positive externality and only on supply side but fine let’s stick to it. In your example, if property rights would exist the positive externality would disappear by being captured fully by price producers charge so supply would shift to the right. In case we would have no property rights which created the externality the whole supply shifts to the left because at any price producers don’t get compensated for that extra benefit they provide
1muflon1
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2022-02-06T17:34:08.700Z
"*if property rights would exist*" I [specified that they do not](https://economics.stackexchange.com/questions/50324/what-does-the-price-quantity-diagram-of-a-good-with-both-negative-production-and/50326?noredirect=1#comment81079_50326): "*yields $1/drink sold worth of benefit to the people living close to the factory. Not to the producers*"
Giskard
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2022-02-06T17:35:22.613Z
"*In case we would have no property rights which created the externality the whole supply shifts to the left*" compared to the case where there was no externality?
Giskard
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2022-02-06T17:36:24.810Z
Seems to me that in your stories it is the **pricing in of the externality** that shifts the supply/demand curve, not the existence of the externality.
Giskard
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2022-02-06T17:36:42.180Z
@Giskard but I am showing you the counterfactual argument. Like how would you want to explain effect of removing the minimum wage if you are not willing to discuss counterfactual without minimum wage on a grounds you assumed it cannot be repealed. Yes in your case property rights don’t exist, but counterfactual can still be constructed
1muflon1
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2022-02-06T17:37:01.110Z
"*Can you please explain without going to a different scenario/theory.*"
Giskard
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2022-02-06T17:38:15.677Z
So, there are two scenarios: A - no externality. B - externality, no property rights or taxes, externality is **not priced in**. Is supply (or demand) shifted by the externality?
Giskard
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2022-02-06T17:38:54.790Z
I am not talking about marginal social benefit or anything like that, I am asking if supply or demand shifts.
Giskard
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2022-02-06T17:40:00.867Z
@Giskard I don’t understand what do you mean by saying going to different scenario theory I used your scenario of production externality to explain that if it would not exist demand would shift
1muflon1
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2022-02-06T17:42:13.230Z
When writing about minimum wage and property rights? I do admit that the final sentence in [this comment](https://economics.stackexchange.com/questions/50324/what-does-the-price-quantity-diagram-of-a-good-with-both-negative-production-and/50326?noredirect=1#comment81087_50326) was relevant but then you never clarified it when [I asked](https://economics.stackexchange.com/questions/50324/what-does-the-price-quantity-diagram-of-a-good-with-both-negative-production-and/50326?noredirect=1#comment81089_50326) about it.
Giskard
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2022-02-06T17:42:51.937Z
"So, there are two scenarios: A - no externality. B - externality, no property rights or taxes, externality is not priced in. Is supply (or demand) shifted by the externality?" yes supply would shift moving from scenario A and B
1muflon1
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2022-02-06T17:43:23.993Z
@Giskard I am sorry I am just really confused by your comments thats it
1muflon1
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2022-02-06T17:43:30.580Z
Excellent. Can you please explain to me why, what motivates the producers to alter their behavior?
Giskard
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2022-02-06T17:46:19.430Z
@Giskard but thats what I was explaining above. scenario A) that 1 extra dollar of benefit is captured by price - I am assuming we are holding everything else constant so product still has the same benefit to consumer but now consumer is forced to pay for that 1 extra benefit. In scenario, B where producers cannot charge for that 1 benefit supply shifts to the left because now they are willing to supply less at any price
1muflon1
CC BY-SA 4.0
2022-02-06T17:52:17.813Z
@Giskard this is by the way why pigovian taxes/subsidies work. In your case a pigouvian subsidy of 1 dollar would literally shift the supply to the position in scenario A
1muflon1
CC BY-SA 4.0
2022-02-06T17:53:39.270Z
"*[externality is not priced in](https://economics.stackexchange.com/questions/50324/what-does-the-price-quantity-diagram-of-a-good-with-both-negative-production-and/50326?noredirect=1#comment81097_50326)*", so why would you assume that "*[consumer is forced to pay for that 1 extra benefit](https://economics.stackexchange.com/questions/50324/what-does-the-price-quantity-diagram-of-a-good-with-both-negative-production-and/50326?noredirect=1#comment81100_50326)*"? It is not their benefit, it is someone elses?
Giskard
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2022-02-06T17:55:18.247Z
Yes, I understand what [Pigouvian taxes are](https://economics.stackexchange.com/questions/50324/what-does-the-price-quantity-diagram-of-a-good-with-both-negative-production-and/50326?noredirect=1#comment81101_50326), but we are talking about scenarios where **the externality is not priced in**.
Giskard
CC BY-SA 4.0
2022-02-06T17:56:28.487Z
@Giskard but we are comparing scenario A and B without and with externality. No externality = benefits priced in market price using common definition of externality from MWG and other textbooks
1muflon1
CC BY-SA 4.0
2022-02-06T17:59:19.443Z
?? In one scenario (B) the factory is not venting the excess heat but heating homes with it, in the second they do not (A). How is there no externality?
Giskard
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2022-02-06T18:00:17.480Z
@Giskard because there is no external benefit in scenario A
1muflon1
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2022-02-06T18:04:01.273Z
Sorry, I have to go. I don't think we are going to resolve this anyway. Have nice day!
Giskard
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2022-02-06T15:47:03.473Z
2022-02-06T16:04:10.800Z
2022-02-06T16:04:10.800Z
1muflon1
<p>The good in this case is coal, which I assume has both production and consumption externalities?</p>
<p>I haven't been able to find a price-quantity diagram on google so far depicting such a case, with welfare loss and especially negative externality per unit clearly depicted.</p>
<p>Thanks in advance.</p>

CC BY-SA 4.0
2022-02-06T06:30:35.067Z
What type of graph do you mean, what are on the axes?
Giskard
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2022-02-06T07:18:08.860Z
@Giskard What I mean is how the graph looks, with the welfare loss and the negative externality arrows etc.
aayush
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2022-02-06T07:19:32.877Z
"*what are on the axes*"?
Giskard
CC BY-SA 4.0
2022-02-06T07:20:34.493Z
See a stylized version of our conversation: > A: What does "X" look like? B: What do you mean by "X"? A: I just want to know what it looks like! < Hopefully you see that B cannot hope to describe "X" without knowing what it is.
Giskard
CC BY-SA 4.0
2022-02-06T07:50:45.210Z
@Giskard I think I misunderstood you, sorry. The axis would be quantity on the x-axis, and price on the y-axis, somewhat similar to this: (https://courses.byui.edu/econ_150/econ_150_old_site/images/11-1_Externalities_03.jpg). I would like to know what the shape of the welfare loss will be, as $MSB < MPB$ and $MSC > MPC$.
aayush
CC BY-SA 4.0
2022-02-06T12:02:29.153Z
I've taken the liberty of editing your question to specify that you mean a price-quantity diagram.  Please feel free to reverse the edit if I've misunderstood.
Adam Bailey
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2022-02-06T13:05:48.127Z
@AdamBailey That is correct, thank you.
aayush
<welfare-economics><externalities>
What does the price-quantity diagram of a good with both negative production and consumption externalities look like?
aayush
# What does the price-quantity diagram of a good with both negative production and consumption externalities look like?

(Asked by: username_0 on 2022-02-06)

The good in this case is coal, which I assume has both production and consumption externalities?

I haven't been able to find a price-quantity diagram on google so far depicting such a case, with welfare loss and especially negative externality per unit clearly depicted.

Thanks in advance.

**Tags:** welfare-economics, externalities

> **Comments:**
> **username_1**: What type of graph do you mean, what are on the axes?  
> **username_0**: @username_1 What I mean is how the graph looks, with the welfare loss and the negative externality arrows etc.  
> **username_1**: "*what are on the axes*"?  
> **username_1**: See a stylized version of our conversation: > A: What does "X" look like? B: What do you mean by "X"? A: I just want to know what it looks like! < Hopefully you see that B cannot hope to describe "X" without knowing what it is.  
> **username_0**: @username_1 I think I misunderstood you, sorry. The axis would be quantity on the x-axis, and price on the y-axis, somewhat similar to this: (https://courses.byui.edu/econ_150/econ_150_old_site/images/11-1_Externalities_03.jpg). I would like to know what the shape of the welfare loss will be, as $MSB < MPB$ and $MSC > MPC$.  
> **username_2**: I've taken the liberty of editing your question to specify that you mean a price-quantity diagram.  Please feel free to reverse the edit if I've misunderstood.  
> **username_0**: @username_2 That is correct, thank you.  

---

## 2 answers

### Answer by username_2 on 2022-02-12. Score: 2 | Accepted answer

I'm answering this from first principles as I also haven't been able to find a source illustrating the case of negative externalities in both production and consumption.

The price-quantity diagram needs 4 curves, marginal private cost (= supply) intersecting marginal private benefit (= demand) at the market equilibrium with quantity $Q\_e$, and marginal social cost intersecting marginal social benefit at the social optimum with quantity $Q\_{opt}$:
[![enter image description here](https://i.sstatic.net/pJngn.png)](https://i.sstatic.net/pJngn.png)

To identify the welfare loss we need to consider the status of the various labelled areas.

* Areas A,B,C,D,E,F are between the MPB and MPC curves, so form the private surplus, that is, the combined consumer surplus and producer surplus.
* Areas C,E,F,G are between the MPC and MSC curves, so represent the social loss due to the negative production externality.
* Areas A,D,F,H are between the MSB and MPB curves, so represent the social loss due to the negative consumption externality.

Note that area F represents a double social loss.

The net social surplus at the market equilibrium is therefore (A + B + C + D + E + F) - (C + E + F + G) - (A + D + F + H) = B - F - G - H. But at the social optimum, the net social surplus is B, the area between the MSB and MSC curves.

Therefore the welfare loss due to the externalities is the net social surplus at the welfare optimum less the net social surplus at the market equilibrium which is B - (B - F - G - H) = **F + G + H**, the shaded area.

The diagram also shows the total negative externality per unit, on the assumption that, as shown, the private and social curves are parallel on both the cost and benefit sides (if they are not parallel, then total negative externality per unit will be different at different quantities).

> **Comments:**
> **username_0**: This is by far the clearest answer I've received, thank you.  

---

### Answer by username_3 on 2022-02-06. Score: 0

Negative consumption externality shifts demand to the right (compared to counterfactual with no externality) because it means that people do not pay full cost of the consumption.

Negative production externality shifts supply to the right (compared to counterfactual with no externality) because it means producers do not need to pay for all extra costs they create for society.

Hence both happening at the same time will look something like the picture below:

[![enter image description here](https://i.sstatic.net/uROS9.jpg)](https://i.sstatic.net/uROS9.jpg)

> **Comments:**
> **username_1**: "*Negative consumption externality shifts demand to the right*" demand does not really shift, the curve showing marginal social benefits is a shifted version of the demand curve. Same with supply.  
> **username_3**: @username_1 I meant comparing to hypothetical counterfactual reality where externality does not exist. If you could turn on/off externality like flicking switch it would shift demand because negative consumption externality for example makes people consume more at any price compared to the case where somehow that externality is priced by market (like hypothetical where there are private rights to air). Btw that’s identical to comparing it to marginal social benefit because if there is no externality MSB=MPB and same for supply  
> **username_1**: "*If you could turn on/off externality like flicking switch it would shift demand*", this is not generally true. In fact, it is usually not true.  
> **username_1**: "*for example makes people consume more at any price compared to the case where somehow that externality is priced by market*" Yes, if you compare it to this **special** case/conterfactual, you are right, but you don't seem to mention that the externality is priced in by the market in your answer. Externalities are usually **not** priced in by the market, so this is an (unrealistic) assumption that should be stated explicitly. Or you can just rephrase your claim.  
> **username_3**: @username_1 i am not sure if I understand. I labeled the D&S lines as D and S with no externality (that is counterfactual world where externality does not exist) - pricing in was just an example but note if externality is priced in by market then it ceases to be externality - since by definition externalities are third party effects not captured by market price (at least by definition in MWG and regular textbooks). We can make a thought experiment where we imagine a world where CO2 does not have effect on global warming as well. Also, I honestly don’t understand your objection to my phrasing.  
> **username_3**: In virtually any discussion of policy in policy economics you compare policy to some counterfactual that is not necessarily realistic. For example, having no minimum wage might not be realistic given political situation but I don’t see anything wrong with drawing a graph piloting situation with no minimum wage even if it’s unrealistic counterfactual and compare it to situation to minimum wage. Or having 100% income tax might not be realistic but interesting counterfactual to ponder over.  
> **username_1**: This is odd; perhaps I am the one who misunderstands something. Thought experiment: you have a demand function for tea (or coffee or some drink). Now imagine that, unbeknownst to you, the company producing it changes a part of the manufacturing process and this yields $1/drink sold worth of benefit to the people living close to the factory. Not to the producers, nor to you, you and other consumers don't even know about it. Does your demand for this drink shift because of this externality? If yes, why? If not, what did you mean by "*externality shifts demand*"?  
> **username_3**: @username_1 but that’s different thought experiment with externality to producer. In your case supply would shift because producers would be willing to produce more at any price than before and the benefit is not reflected in price. I mean this is the same as taxation where we talk about demand shifts. For example suppose we have no negative externality because it’s somehow possible to have property rights to clean air. Also let’s focus on demand only so assume externality is only on consumption side - you drive truck u create externality but assume production is clean. Now in this case if  
> **username_1**: You are right, the externality is at the supply side. But why is "*producers would be willing to produce more*" true?  
> **username_1**: It is **not** the same as taxation - there you do feel the effect, unlike with an externality, where someone else feels the effect!  
> **username_3**: Property rights to clean air are removed suddenly consumers don’t need to buy clean right when they drive (if there would be property rights they would have to like with pollution permits) now that they don’t have to pay for that regardless of what the price on the market is the demand will shift to the right along the whole demand curve because the complement (clean air consumption) got free.  
> **username_1**: Can we please stick to my simple example where externalities are not priced in, nor is there a market for free air? Your examples are a bit too convoluted for me.  
> **username_3**: @username_1 but you do feel effect - not the external effect but the effect of not having to pay for that external effect. And this is like a tax, that’s why taxes solve externalities… if it would not be like a tax Pigovian taxes would be impossible I hope you are not suggesting that  
> **username_1**: So, w.r.t. my example, what [do you mean](https://economics.stackexchange.com/questions/50324/what-does-the-price-quantity-diagram-of-a-good-with-both-negative-production-and/50326?noredirect=1#comment81080_50326) by "*producers would be willing to produce more*"? Can you please explain without going to a different scenario/theory.  
> **username_3**: @username_1 ok we can stick to your example but your example is not the example that pertains to the question asked by OP since it’s positive externality and only on supply side but fine let’s stick to it. In your example, if property rights would exist the positive externality would disappear by being captured fully by price producers charge so supply would shift to the right. In case we would have no property rights which created the externality the whole supply shifts to the left because at any price producers don’t get compensated for that extra benefit they provide  
> **username_1**: "*if property rights would exist*" I [specified that they do not](https://economics.stackexchange.com/questions/50324/what-does-the-price-quantity-diagram-of-a-good-with-both-negative-production-and/50326?noredirect=1#comment81079_50326): "*yields $1/drink sold worth of benefit to the people living close to the factory. Not to the producers*"  
> **username_1**: "*In case we would have no property rights which created the externality the whole supply shifts to the left*" compared to the case where there was no externality?  
> **username_1**: Seems to me that in your stories it is the **pricing in of the externality** that shifts the supply/demand curve, not the existence of the externality.  
> **username_3**: @username_1 but I am showing you the counterfactual argument. Like how would you want to explain effect of removing the minimum wage if you are not willing to discuss counterfactual without minimum wage on a grounds you assumed it cannot be repealed. Yes in your case property rights don’t exist, but counterfactual can still be constructed  
> **username_1**: "*Can you please explain without going to a different scenario/theory.*"  
> **username_1**: So, there are two scenarios: A - no externality. B - externality, no property rights or taxes, externality is **not priced in**. Is supply (or demand) shifted by the externality?  
> **username_1**: I am not talking about marginal social benefit or anything like that, I am asking if supply or demand shifts.  
> **username_3**: @username_1 I don’t understand what do you mean by saying going to different scenario theory I used your scenario of production externality to explain that if it would not exist demand would shift  
> **username_1**: When writing about minimum wage and property rights? I do admit that the final sentence in [this comment](https://economics.stackexchange.com/questions/50324/what-does-the-price-quantity-diagram-of-a-good-with-both-negative-production-and/50326?noredirect=1#comment81087_50326) was relevant but then you never clarified it when [I asked](https://economics.stackexchange.com/questions/50324/what-does-the-price-quantity-diagram-of-a-good-with-both-negative-production-and/50326?noredirect=1#comment81089_50326) about it.  
> **username_3**: "So, there are two scenarios: A - no externality. B - externality, no property rights or taxes, externality is not priced in. Is supply (or demand) shifted by the externality?" yes supply would shift moving from scenario A and B  
> **username_3**: @username_1 I am sorry I am just really confused by your comments thats it  
> **username_1**: Excellent. Can you please explain to me why, what motivates the producers to alter their behavior?  
> **username_3**: @username_1 but thats what I was explaining above. scenario A) that 1 extra dollar of benefit is captured by price - I am assuming we are holding everything else constant so product still has the same benefit to consumer but now consumer is forced to pay for that 1 extra benefit. In scenario, B where producers cannot charge for that 1 benefit supply shifts to the left because now they are willing to supply less at any price  
> **username_3**: @username_1 this is by the way why pigovian taxes/subsidies work. In your case a pigouvian subsidy of 1 dollar would literally shift the supply to the position in scenario A  
> **username_1**: "*[externality is not priced in](https://economics.stackexchange.com/questions/50324/what-does-the-price-quantity-diagram-of-a-good-with-both-negative-production-and/50326?noredirect=1#comment81097_50326)*", so why would you assume that "*[consumer is forced to pay for that 1 extra benefit](https://economics.stackexchange.com/questions/50324/what-does-the-price-quantity-diagram-of-a-good-with-both-negative-production-and/50326?noredirect=1#comment81100_50326)*"? It is not their benefit, it is someone elses?  
> **username_1**: Yes, I understand what [Pigouvian taxes are](https://economics.stackexchange.com/questions/50324/what-does-the-price-quantity-diagram-of-a-good-with-both-negative-production-and/50326?noredirect=1#comment81101_50326), but we are talking about scenarios where **the externality is not priced in**.  
> **username_3**: @username_1 but we are comparing scenario A and B without and with externality. No externality = benefits priced in market price using common definition of externality from MWG and other textbooks  
> **username_1**: ?? In one scenario (B) the factory is not venting the excess heat but heating homes with it, in the second they do not (A). How is there no externality?  
> **username_3**: @username_1 because there is no external benefit in scenario A  
> **username_1**: Sorry, I have to go. I don't think we are going to resolve this anyway. Have nice day!  

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