Chapter 75, Problem 1FRQ

To determine

The correctly labeled graph which shows the quantity of antivirus software purchased, the socially optimal quantity of antivirus software, deadweight loss, and a list of two different government policies that could bring for the optimal quantity of antivirus software.

Explanation of Solution

The graph for the quantity of antivirus software:

The vertical axis of the graph represents the marginal social benefit and price of antivirus software and the horizontal axis shows the quantity of antivirus software. The supply curve which is equal to the marginal cost curve indicates an upward slope because when there is no external cost, then the marginal private cost is equal to the marginal social cost. The demand curve is downward sloping and equivalent to this curve, the marginal social benefit curve is also downward slope. The shaded area represents the deadweight loss. The market quantity of antivirus software is found at the point where demand and supply curves intersect.

And, the socially optimal quantity of antivirus software in the market is at the point of QQPT where the supply curve and marginal social benefit curve intersect and this quantity is shown on the horizontal axis.

In this case, two different government policies that could bring about an optimal quantity of antivirus software would consider:

Pigouvian subsidy: At the socially optimal quantity of antivirus software, the Pigouvian subsidy would be equal to the marginal external benefit at the optimal quantity.

Policy of optimal quantity: The government regulation would require the optimal quantity of antivirus software where marginal social benefits and costs are equal.

Economics Concept Introduction

Introduction: Externality problems such as pollution refer to the fundamental economic policy problems while firms do not internalize the indirect costs or indirect benefits from any of their economic transactions in the market. The quantity where all the costs and benefits are accounted for is called socially optimal quantity. When demand and supply go out of equilibrium due to market inefficiencies, then it is a situation of deadweight loss.