Question: Refer to Figure when answering this question
a. Redraw Figure, panel (a), assuming that the production externality is positive so that the SMC curve lies below the supply curve. Label the area c that reflects the change in the cost of the externality when trade is opened. Is this area an additional social gain from free trade or an offsetting cost?
Can you think of a real-world example of this case?
b. Redraw Figure, panel (b), assuming that the consumption externality is positive so that the SMB curve lies above the demand curve. Label the area d that arises when trade is opened, and explain why this area is an additional social gain from free trade. (You can refer to the discussion of solar panels earlier in the chapter.)
