PRIN OF MICROECONOMICS
2nd Edition
ISBN: 9780393914085
Author: coppock
Publisher: Norton, W. W. & Company, Inc.
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Question
Chapter 7, Problem 1QR
To determine
Explain the effect of positive externalities with supply and
Expert Solution & Answer
Explanation of Solution
In a market, if the positive externalities are present, free market will not produce as much of an item as would be socially optimal, as firms do not necessarily include the external benefits they are providing in their decision-making process. Thus, when third parties enjoy the positive externalities, then the market will under-produce.
Figure 1 shows the internal demand, social demand, and internal supply curve as follows:
From Figure 1, Qs is the social optimal quantity because it includes the external benefits to society and is taken as the total social benefits of consuming.
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