Final answer:
A negative externality in supply and demand is when external costs, like noise pollution from street trumpets, affect third parties and are not included in market prices, leading to market failure. Accounting for the externality generally raises the equilibrium price and lowers the equilibrium quantity to better reflect the true social costs.
Step-by-step explanation:
When discussing a negative externality in supply and demand, it typically refers to a situation where the production of a good or service imposes costs on third parties that are not reflected in the market price. In the case of a firm playing trumpets on the streets, the negative externality might be noise pollution, which affects the community but is not accounted for in the supply curve (Qs1).
The equilibrium price and quantity, when only private costs are considered (without social costs), will be at a point where the supply and demand curves intersect. However, when social costs (Qs2) are taken into account, the supply curve shifts leftwards, resulting in a higher equilibrium price and lower equilibrium quantity. This reflects the true cost of production, accounting for the externality.
Therefore, accounting for the externalities usually results in a decrease in the quantity supplied and an increase in the price. This adjustment attempts to correct the market failure that occurs when external costs, like pollution, are not considered in the transaction. This is essential for achieving a more socially efficient outcome where the social costs are internalized within the market price.