Question

Consider the market for a good that has a positive externality and that is produced by a monopolist. How does the amount produced in the absence of any government policy compare with the amount that would maximize the total social surplus? Identify the total private surplus, external benefits, and total social surplus both at the level of production that occurs without government intervention and at the level of production that maximizes the total social surplus. What is the deadweight loss in the absence of government intervention?

Answer 1

It is very important in a economy to have government intervention so that the  economy functions properly. If any goods is produced by a monopolist and there is no government intervention than that goods will be sold at a much higher price and whoever will be able to pay higher amount will enjoy the goods and the rights of other people will be badly affected.The government regulates the prices of goods to create a better social environment where every people can afford to purchase and enjoy the goods.But in a monopolist environment without any government intervention the monopolists charge huge amount for the goods and the social structure get disturbed, the people with low purchasing power are badly affected in this scenario.The total private surplus is affected, a particular segment of people are benefitted, and social surplus is also affected because of the non presence of the government intervention. Deadweight cost rises due to market inefficiency .the supply and demand becomes out of equilibrium,and it arises due to inefficient allocation of resorces among the society.