4) Externality Diagrams - MMT

Question 1

what is the demand curve now known as?

Answer 1

known as the Marginal Private Benefit line (MPB)

Question 2

what does the Marginal Private Benefit Line (MPB) show?

Answer 2

shows how much benefit a consumer receives from consuming the good or service

Question 3

what is the supply curve now known as?

Answer 3

known as the Marginal Private Cost line (MPC)

Question 4

what does the Marginal Private Cost line (MPC) show?

Answer 4

shows how much it costs the business to supply/produce the good or service

Question 5

what does it mean MPB=MPC?

Answer 5

• where demand= supply is equilibrium, where MPB=MPC is the point of free market allocative efficiency, this is the same as equilibrium

Question 6

when are resources allocated efficiently for society?

Answer 6

at the point where MSB=MSC, the S indicating social/society

Question 7

how do you start a market failure diagram?

Answer 7

1) label P and Q
2) draw D= MPB, S= MPC
3) insert the point of free market allocative efficiency P1Q1
4) Then, make things happen in your diagram

Question 8

how do you draw a diagram showing externality of production?

Answer 8

• we assume that the benefit the consumers gets is unaffected. In other words, there is no external benefit, only an external cost
• so D = MPB=MSB
• relatively realistic, eg a consumer buying painkillers wont know if the factory polluted

Question 9

how do you draw a diagram showing externality of consumption?

Answer 9

• we assume that the cost of making the product is unaffected
• in other words, there is no external cost so S= MPC=MSC
• this is realistic, just because a consumer drinks too much alcohol doesn’t mean the process of making it was harmful

Question 10

why in a negative externality of production diagram is the social cost higher than the private cost?

Answer 10

due to an external cost that needs to be added into the equation

Question 11

how do you draw a negative externality diagram of production ? how is market failure shown?

Answer 11

• Every point on the MSC line should be higher up the graph than the MPC line
• The market failure is shown by starting from your MPB = MPC line (free market) drawing a line up to MSC line and then completing a triangle to where MSB=MSB

Question 12

in a negative externality of consumption diagram, why is the benefit to society (MSB) less than the benefit to the private individual (MPB)?

Answer 12

because there is a negative benefit to consider

Question 13

negative externality of production:

social cost is… than the private cost

Answer 13

higher

Question 14

negative externality of consumption:

benefit to society is (MSB) … than the benefit to the private individual (MPB)

Answer 14

less

Question 15

how do you draw a negative externality of consumption diagram?

Answer 15

• Every point on the MSB line should be lower down the graph than the MPB line
• Start your diagram at MPB=MPC, draw a line down to the MSB line and then complete the triangle to where MSB=MSB

Question 16

for a positive externality of production, the cost to society (MSC) is… than the cost to the company

Answer 16

lower

Question 17

how do you draw a positive externality of production diagram?

Answer 17

• every point on the MSC line should be lower down the graph than the MPC line
• this is illustrated by starting from your MPB=MPC line (free market) drawing a line down to MSC line and then completing a triangle to where MSB=MSB

Question 18

for positive externality of consumption why is the benefit to society (MSB) greater than the benefit to the private individual (MPB)?

Answer 18

• there is a positive benefit to consider

Question 19

positive externality of consumption:

the benefit to society (MSB)… than the benefit to the private individual (MPB)

Answer 19

greater

Question 20

how do you draw a positive externality of consumption diagram?

Answer 20

• Every point on the MSB line should be higher up the graph than the MPB line
• Start your diagram at MPB=MSB; draw a line up to the MSB line and then complete the triangle to where MSB=MSB

Question 21

what do the triangles on the negative externality diagrams represent?

Answer 21

• are welfare losses to society of the failing market
• this should point to the left

Question 22

what do the triangles on the positive externality diagrams represent?

Answer 22

• also welfare losses to society
• should point right

Question 23

if the externality is of production what is the D label?

Answer 23

D = MPB = MSB

Question 24

if the externality is of consumption what is the S label?

Answer 24

S = MPC = MSC

Question 25

for negative externalities of production, what is the relation of the MSC and MPC line?

Answer 25

the MSC is higher up than MPC

Question 26

for positive externalities of production, what is the relation of the MSC and MPC line

Answer 26

the MSC line is lower down than the MPC line

Question 27

for negative externalities of consumption, what is the relation of the MSB and MPB line?

Answer 27

the MSB is lower down the MPC line

Question 28

for positive externalities of consumption, what is the relation of the MSB and MPB line?

Answer 28

the MSB line is higher up than the MSB line

Question 29

where is the social optimum (always)?

Answer 29

where MSB= MSC

Question 30

diagrams with negative externalities, why does the welfare loss triangle point left?

Answer 30

because we want less

Question 31

diagrams with positive externalities, why does the welfare loss triangle point left?

Answer 31

because we want more