night would be a negative externality. If you love country music, then what amounts to a series of free

concerts would be a positive externality.

Pollution as a Negative Externality

Pollution is a negative externality. Economists illustrate the social costs of production with a demand and

supply diagram. The social costs include the private costs of production that a company incurs and the

external costs of pollution that pass on to society. Figure 12.2 shows the demand and supply for manufacturing
refrigerators. The demand curve (D) shows the quantity demanded at each price. The supply curve (Sprivate)
shows the quantity of refrigerators that all firms in the industry supply at each price assuming they are taking
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