This video lesson is from the 2001 AP Microeconomics Exam. This video is designed for students to practice the question to enhance their content knowledge on externalities, and as a resource for teachers to use in their classroom. There is no audio in this video lesson, just a continuous video of the questions and answers. The overall objective is for students to pause the video, answer the questions, and play the video to see if they get the questions correct. This is where teachers can explain why the answer is correct to their students if needed. I hope you find this video lesson helpful. This question tested the student’s understanding of a negative externality. The student was asked to show that the supply curve that incorporated all costs, both private and social, would lie above the supply curve with only private costs. The student should show a market supply curve that includes only private costs of production. For a given market demand curve, there will be an equilibrium price and quantity of output. There should be a second supply curve that incorporates all costs of production, including the external costs. The socially optimum level of output is found at the intersection of the market demand and the supply curve that incorporates all costs, both private and external. With the same market demand curve, at the social optimum, the equilibrium price should be higher and the equilibrium quantity lower. In essence, the unregulated private market will produce too much output at too low a unit price. To achieve the socially optimum level of output, the government could introduce a unit tax on output. If properly chosen, this tax could raise the supply curve with only private costs to intersect at the socially optimum output level. Alternatively, quantity controls or pollution permits could be used to correct the overproduction.