Sunday, September 28, 2014

Market Failure 5 - Positive Consumption Externality

Positive Consumption Externality

Positive Consumption Externality: The type/name of the externality tells you what you need to do!

Positive = Positive (duh!) (we want more of it)
Consumption = Benefits = Demand (there will be two demand curves, MSB & MPB)
  • Positive = we want more
  • Consumption = benefits = demand
  • Triangle = DWL (dead weight loss) (points to society) & is between the two demand curves
  • SOQ = Socially Optimal Quantity or the quantity desired by society (Pos.= more quantity)
  • Underproduction =  If we want more we must be underproducing the good. (duh!)
  • MSB = MSC, obviously where social benefits and costs equal,  equilibrium quantity- Q*
  • Subsidy shifts supply right, lowering price, increasing quantity consumed.
  • CLG - always a correctly labelled graph
  • Triangle - always points to society - to help you know which demand/cost curve is drawn above or below, know that the triangle always points to (MSB) society for a Positive Consumption Externality... Your going to say,, but Charles I could draw the curve pointing to the left and still have it between the curves,,, but then the triangles point would be pointing to an equilibrium of less production (we need more).
  • Subsidy has been granted, shifting supply right, lowering price.
  • Check your graph and make sure it is showing what you want,,, to get more consumption prices must go lower. (look above and you will see this is exactly what has happened, prices have decreased and quantity produced has risen.)

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