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I've read that the tragedy of the commons can be seen as a negative externality. That is, $MSC > MPC$. However, I'm having trouble understanding why the supply curve actually shifts downwards due to this.
I know, graphically, that the $MSC$ curve will be above the $MPC$ curve. But, what do the external costs mean in this context and how would it all look graphically?
The reason why it boosts supply is that the costs are not born by produces. For example, since you can’t own fresh air due to lack of property rights (tragedy of the commons) firms don’t need to pay for using up the clean air by pollution and hence it does not enter their cost functions.
Recall decrease in costs shifts supply right as at lower cost firms are willing to supply more at any price.
I created a graphical example of this for you in overleaf. As the graph show in presence of externality the supply $S$ shifts right and new supply is $S_E$. Demand remains unchanged because the externality affects production costs not preferences or other factors affecting demand. The new equilibrium will be at the intersection of $D$ and $S_E$. In this new equilibrium price is too low and quantity too high compared to social optimum which would be at the intersection of demand and supply without the externality.
The vertical distance between the supplies is the value of the external costs (externality).
The S and SE curves appear the wrong way round. The free mkt outcome is over-fishing, the optimal soln. is less than free mkt.
