Positive Externalities Flashcards
What are positive externalities
Positive effects to third parties outside the price mechanism.
Where is the market equilibrium?
Where MPC=MPB
Since producers and consumers don’t consider the external benefits of their actions they end up…
Underconsuming and underproducing which results in a potential welfare gain
How can the gov prevent underconsumption and underproduction?
Providing Subsidies
When subsidising, the subsidy must equal to..
The external benefit at the socially efficient quantity
What is maximum price
Maximum price is the highest price suppliers of a good can sell for.
Pmax being below the equilibrium price means that there will be…
Excess demand
Example of implementing max price
Setting max price on housing as it is a necessity and consumers may be getting exploited
EV of maximum price
As prices decrease, quality of goods I.e landlords will offer low quality houses decreasing standard of living.
Very costly
EV of subsidies
Opportunity cost- could be spent on NHS to alleviate strain as workers are paid low wages, staff shortages
Hard to estimate how much to subsidise
If subsidising firms, grants can be used to pay of debts and increase bonuses.
If subsiding alternatives, it may not be effective if demand if inelastic in the short run
