Question 3 (b)

  • Private Cost = Supply

  • Private Value = Demand

  • Negative Externalities: Social Cost = Private Cost (Supply) + External Cost

    Negative Externalities Because of the external cost, marginal social cost is over marginal private cost \*The social quantity demand Qs QP \> Qs -5 Market Failure Cost benefit MSC Deadweight loss of externality / Welfare loss sociöl optimum output MPC MPB Output

  • Positive Externalities: Social Value = Private Value (Demand) + External Benifit

    Positive Externalities Government can implement subsidy to solve this situation, but how much subsidy? Cost benefit Subsidy paid Deadweight loss of subsidy MPC Subsidy p unit MSB MPB social optimum output Output Qs

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