down the columns of quantity demanded (the second column) and the “quantity supplied after paying the costs

of the externality” (the fourth column) then refer to the first column of that row to determine the equilibrium

price. In this case, the equilibrium will be at a price of $12 and a quantity of four.

Step 5. Consider how taking into account the externality affects the equilibrium price and quantity. Do this by

comparing the two equilibrium situations. If the firm is forced to pay its additional external costs, then

production of trumpet songs becomes more costly, and the supply curve will shift up.

Remember that the supply curve is based on choices about production that firms make while looking at their

marginal costs, while the demand curve is based on the benefits that individuals perceive while maximizing

utility. If no externalities existed, private costs would be the same as the costs to society as a whole, and private
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