Figure: Marginal Private Benefits and Marginal Social Benefits Without governmen
ID: 1214620 • Letter: F
Question
Figure: Marginal Private Benefits and Marginal Social Benefits Without government intervention, this market will produce units at a price of. The private equilibrium therefore results in a shortage of units. If the government were to intervene in this market and encourage individuals to fully internalize the external benefits of consumption, what would be the resulting equilibrium quantity and price in this market? Q_0; P_1 Q_1; P_0 Q_1; P_2 Q_2; P_1 What would be the level of subsidy required to promote the socially optimal level of provision? P_1-P_2 P_0-P_2 P_0-P_4 P_1-P_4Explanation / Answer
In this problem, product is generating extrenality. Usually owner of a commodity enjoys its benefit. But sometimes outsiders also get affected and gets the benefit of commodity. It is known as exterality. Suppose a person has planted varieties of roses in his garden. Sweet fragrance of the flowers are enjoyed by the garden owner. Also passersby can enjoy it. Thus garden is producing externality. It can be positive or negative.
The problem has positive externality. Two diagrams are shown. First one is marginal private benefit (MPB). It is the extra benefit from extra unit generated. It decreases with the increase in price. Thus curve has negative slope. With this MPB add positive externality that product generates to the society. Then you will get total social benefit. Here marginal social benefit of each extra unit has been computed by adding marginal external benefit with MPB. The curve is shown as MSB. It is to right side of MPB. Gap is marginal externality effect.
Also there is a supply curve with positive slope. At higher price more units are supplied. At the point of intersection of MPB and supply curve, equal quantities are demanded and supplied. In absence of government intervention, this market will produce the quatity at this intersection point. Thus Q1 units will be produced at P2 price. But from societies point of view total demand is Q3 units at P2 price. It is available from MSB curve. Thus a shortage of Q3-Q1 unit is observed.
Answer: Option C is correct (Q1;P2;Q3-Q1)
------------------------------------------------------------------------------------------------------------------
2. If government intervene, then production will be made upto the quantity where MSB curve has intersected S curve. Thus Q2 quantity will be supplied at P1price.
Answer: Option (D) is correct (Q2;P1)
----------------------------------------------------------------------------------------------------------------------
3. As the price in case of government intervention (P1) is higher than price P2 (prevailing in without intervention situation), therefore, Government must give subsidy of P1-P2 to achieve it.,
Answer: Option A is correct.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.