A more precise way to portray externality problems

On the OCC last month I asked if someone could explain to me why the source of the externality matters when drawing externality diagrams. Thankfully, Peter Rock sent my question along to Ellie Tragakes, who in turn was very gracious about corresponding with me at length over the course of a few weeks on the issue. Long story short, it matters because the price results that arise when one expresses externality problems differently depending on the source of the externality (production or consumption) are more accurate than the price results that arise when the distinction is ignored. For a more detailed treatment of the issue, please look at:

Representing Externalities

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