Question

Note: Please type the answers do not copy notes it would be difficult to read.

11. Now let’s make one more graph—this time of positive externalities (the private market decision confers some benefit on an unrelated party). Choose a product or service that positively affects others outside of the market exchange and draw the supply and demand curves for it below.

Now add the MPB and MPC labels and draw the equilibrium price and quantity on the graph. Now add a MSB curve (remember—there are MORE than just private benefits now!) and redraw the equilibrium price and quantities on the graph. Answer:

12. Does the standard market for your product/service produce too few or too many?

13. Does the standard market for your product/service create a price that is too high or too low?

14. How could the standard market for your product/service be improved?

15. What did you learn about markets and externalities?

Answer 1

Answer 11) The graph for the positive externality is shown above. The efficient level of quantity in a market occurs at a point where MPC = MPB and the social efficient level of quantity in a market occurs at a point where MPC = MSB. Here, we are taking the example of vaccination.

Answer 12) Here, the diagram indicates that the standard market for vaccination produces too few of the product.

Answer 13) The diagram also indicates that the standard market for vaccination will create a price that is too low.

Answer 14) This market could be improved by giving the subsidies to the domestic producers due to which there is a rightward shift in the MPC from MPC to (MPC + Subsidy) and the new equilibrium is achieved at E3 at which the socially efficient quantity is produced.

Answer 15) In case of externalities, the private equilibrium is not the socially efficient point and there is a need of government intervention which moves the economy towards socially efficient equilibrium.