2018 AP Microeconomics FRQ #2
(a) Identify the type of market failure illustrated by the graph. Explain.
The type of market failure is an Positive Consumption "Externality".
(b) Using the numbers on the graph, identify the market equilibrium price and quantity.
(c) Using the labeling on the graph, identify the area representing DWL at the quantity identified in part (b).
Part (b) is the equilibrium price of $6 and quantity of 16, the DWL at that quantity is EDF.
(d) Suppose the government is granting a subsidy to correct the market failure. What is the dollar value of the per unit subsidy to achieve the SOQ (Socially Optimal Quantity)?
(e) Suppose the government installs a price floor at $8,
(i) How many units will producers and consumers exchange? (8)
(ii) Does the Price floor correct the market failure?
NO, it actually makes it worse,, society would like 24 units consumed but after the price floor only 8 units are consumed.
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| College Board Thou canst not vex me with inconsistent mind, Since that my life on thy revolt doth lie. O, what a happy externality do I find, Happy to have thy love, happy to die! |
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