Question

It is important to note that we are assuming that so far there has been NO governmental action regarding the virus. So, there has been no quarantining, there have been no “Stay-at-Home” orders, there have been no orders closing businesses, and, generally, there have been no decisions by a governmental entity regarding the virus.Draw a graph to explain your answer. First, explain (in words) what an “efficient” outcome is in the present context. Then, present an economic argument, using a graph and words, which supports the position that after the virus was introduced into the community an inefficient number of meals was sold. In answering this question, explain carefully and identify graphically how we determine the efficient amount of meals sold and why it is efficient. Then explain carefully (in words and graphically) why an inefficient number of meals was sold after the virus was introduced into the community.Finally, identify the deadweight loss associated with the presence of the virus.’

Answer 1

Let us assume that market was equilibrium at Qopt and Popt. Meals have positive consumption externality. Due to COVID-19 less meals will be bought as people lose income.

In this case, marginal social benefit (MSB) is more than marginal private benefit (MPB). As shown in the diagram below, MSB is to the right of MPB. Subsidies on meals, positive advertsiments will shift MPB to MSB. Society should produce at Qopt whereas it is currently at Qm due to COVID-19.

This is an example of market failure. This occurs because marginal social benefit (MSB) is more than marginal private benefit (MPB) and hence social optimum is not produced.

As shown in the figure below,MSB is to the right of MPB. Society should produce at Qopt whereas it is currently at Qm.

Subsidies , positive advertsiments will shift MPB to MSB. State can also intervene and Make provision of these services with itself so that more of it is provided at low cost and hence society benefits and welfare loss which is present currently is covered too.

Welfare loss in present situation is also show in the diagram.