Positive Externalities

Question 1

What are positive externalities

Answer 1

Positive effects to third parties outside the price mechanism.

Question 2

Where is the market equilibrium?

Answer 2

Where MPC=MPB

Question 3

Since producers and consumers don’t consider the external benefits of their actions they end up…

Answer 3

Underconsuming and underproducing which results in a potential welfare gain

Question 4

How can the gov prevent underconsumption and underproduction?

Answer 4

Providing Subsidies

Question 5

When subsidising, the subsidy must equal to..

Answer 5

The external benefit at the socially efficient quantity

Question 6

What is maximum price

Answer 6

Maximum price is the highest price suppliers of a good can sell for.

Question 7

Pmax being below the equilibrium price means that there will be…

Answer 7

Excess demand

Question 8

Example of implementing max price

Answer 8

Setting max price on housing as it is a necessity and consumers may be getting exploited

Question 9

EV of maximum price

Answer 9

As prices decrease, quality of goods I.e landlords will offer low quality houses decreasing standard of living.

Very costly

Question 10

EV of subsidies

Answer 10

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