Lesson Plan

• Describe what externalities are and distinguish between positive and negative types.
• Explain how externalities cause market failure and generate dead‑weight loss using social vs. private marginal curves.
• Apply Pigouvian taxes and subsidies to internalise externalities and predict their effect on equilibrium quantity and price.
• Evaluate government interventions (taxes, subsidies, regulation, tradable permits) against effectiveness, efficiency, equity and practicality criteria.
• Construct and interpret basic externality diagrams showing over‑production or under‑production.

• Projector or interactive whiteboard
• PowerPoint/slide deck with externality diagrams
• Handout containing summary tables and graph templates
• Worksheets for graph drawing and policy evaluation
• Calculator (optional)
• Sticky notes or index cards for group activity

Start with a quick poll: ask students to name everyday examples where one person’s actions affect others without payment. Link these ideas to their prior knowledge of supply‑demand equilibrium and state the success criteria: identify positive and negative externalities, illustrate their impact on market outcomes, and evaluate corrective policies.

1. Do‑Now (5’) – Students write examples of externalities on sticky notes; a few are shared aloud.
2. Mini‑lecture (10’) – Definition, positive vs. negative externalities, and introduction of SMC/SMB vs. PMC/PMB graphs.
3. Guided practice (12’) – Pairs complete a worksheet graphing market equilibrium, socially optimal point, and dead‑weight loss for a given scenario.
4. Policy simulation (15’) – Groups are assigned a policy (tax, subsidy, regulation, tradable permit) for a case study, calculate the required per‑unit tax/subsidy and discuss expected market changes.
5. Evaluation discussion (8’) – Using the four criteria (effectiveness, efficiency, equity, practicality), groups critique each policy; teacher circulates with probing questions.
6. Recap & exit ticket (5’) – Students write one key takeaway and answer a short question on how a Pigouvian tax corrects a negative externality.

Summarise that externalities create a gap between private and social marginal curves, leading to over‑ or under‑production and dead‑weight loss. Reinforce that corrective taxes or subsidies can realign incentives, but policy choice must balance effectiveness, efficiency, equity and practicality. For homework, students find a real‑world government intervention addressing an externality and evaluate it using the four criteria.