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By S. K. Nath (auth.)

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Free or even restricted trade always extends outward what may be described as the consumption possibilities frontier of an economy in. the short-run. Assume our economy can produce only two goods, x andy. The production possibilities frontier for these two goods is the curve AB in Fig. 3. If there is no foreign trade the points indicating the amounts of production and consumption must lie on or within AB - and must indeed coincide. P may be such a point. But once foreign trade is allowed, then the free-trade world price-line or the tariff-adjusted price-line determines the production point with its tangency to the production frontier (T is such a point); however, our economy is now free to choose a point of consumption anywhere on the price-line EF.

45 externalities: (I) of production on production; (2) of production on consumption; (3) of consumption on consumption; and (4) of consumption on production. Most of Marshall's examples were of the first type; most of Pigou's of the second type. The modern problem of pollution has arisen mainly though. e. the harm that some producers and consumers inflict on other persons without having to 'pay for the 'privilege'; if they had to pay for it, they would restrict the indirect harm. Some examples of such externalities are: industrial smoke, the exhaust fumes of motor vehicles, effluence in rivers, cutting down of hedges and trees, and noise near an airport.

45 externalities: (I) of production on production; (2) of production on consumption; (3) of consumption on consumption; and (4) of consumption on production. Most of Marshall's examples were of the first type; most of Pigou's of the second type. The modern problem of pollution has arisen mainly though. e. the harm that some producers and consumers inflict on other persons without having to 'pay for the 'privilege'; if they had to pay for it, they would restrict the indirect harm. Some examples of such externalities are: industrial smoke, the exhaust fumes of motor vehicles, effluence in rivers, cutting down of hedges and trees, and noise near an airport.

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