Barriers and property rights.
$
Q/t
D
(demand for widgets).
Maker of widgets
doesn’t have to pay
full cost of production.
Pollution quota limits output
by restricting a scarce input.
S
Q
P
S
'
Industry produces “too many” widgets.
§
An
externality
.
§
Example:
pollution.
Q
'
M
§
S is “apparent”
supply curve.
§
S
' is “true”
supply curve.
P
'
