Graphical Representation of a Pigouvian Subsidy for a Positive Consumption Externality
With no production externality, the supply curve represents marginal social cost (MSC), while demand represents marginal private benefit (MPB). The socially efficient quantity, , occurs where marginal social benefit (MSB) intersects MSC. A per-unit subsidy to consumers creates a wedge between the price producers receive and the price consumers pay, shifting the demand curve faced by producers upward by the subsidy. The corrective subsidy at the efficient quantity is , where MEB is marginal external benefit. When the subsidy is set correctly, the private equilibrium moves to and eliminates the deadweight loss from underconsumption; an arbitrarily sized subsidy need not achieve this result.
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Graphical Representation of a Pigouvian Subsidy for a Positive Consumption Externality
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Graphical Representation of a Pigouvian Subsidy for a Positive Consumption Externality
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A market for a good with a positive consumption externality is depicted on a standard graph. The curves are: S = Marginal Social Cost (MSC), D = Marginal Private Benefit (MPB), and MSB = Marginal Social Benefit, which lies above the D curve. The initial market equilibrium quantity is Qm (where D intersects S), and the socially optimal quantity is Qopt (where MSB intersects S). A corrective per-unit subsidy is implemented to move the market to Qopt. Match each economic concept with its correct gr
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- The supply curve (S) represents the marginal social cost.
- The demand curve (D) represents the marginal private benefit.
- A third curve (MSB) represents the marginal social benefit and lies above the demand curve.
- The intersection of S and D occurs at quantity Q1.
- The intersection of S and MSB occurs at quantity Q2.
- At quantity Q2, the pr
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- The upward-sloping supply curve represents the marginal social cost (MSC).
- The downward-sloping demand curve represents the marginal private benefit (MPB).
- A third curve, representing the marginal social benefit (MSB), lies above the demand curve.
The market initially operat
Consider a market for a good whose consumption generates benefits for third parties. The market is represented on a graph with Price on the vertical axis and Quantity on the horizontal axis.
- The upward-sloping supply curve (S) represents the marginal social cost.
- The downward-sloping demand curve (D) represents the marginal private benefit.
- A third curve, representing the marginal social benefit (MSB), lies above the demand curve.
The initial market equilibrium is at point E (quantity Qm,