Question

	Price Market Quantity Demanded Social Quantity Demanded ($) (units per month) (units per month) 20 10 20 18 20 30 16 30 40 14 40 50 12 50 60 10 60 70

	b. Does this product have external benefits or external costs? External benefits c. How large ($) is that externality? ? per unit

Answer 1

(a)

We can represent market demand by Marginal benefit curve and Social demand by Marginal Social benefit curve. As we can see from above table that Marginal Social Demand > Marginal Market demand. this implies Marginal Social benefit > Marginal Private or market benefit. This implies there will be positive externality and hence This Product have external benefits.

(b)

In order to calculate how large is the externality we have to calculate vertical distance between Social demand and market demand. We can see from the above table that suppose quantity = 20 units. Then Price Market are willing to Pay = marginal market benefit = 18. Also, We can see from the above table that suppose quantity = 20 units. Then Social benefit = price society is willing to Pay = marginal social benefit = 20.

hence Vertical distance = Marginal social benefit - marginal market benefit = 20 - 18 = 2.

You can see for any other quantity that Vertical distance = Marginal social benefit - marginal market benefit = 20 - 18 = 2.

Hence, Externality = 2 per unit