3. Positive Externalities Here is the graph present cost and benefit of education. Without considering externality, quantity is at Qp. Cost benefit MPC MPB Output Qp
4. Positive Externalities But education bring more benefit to society Beside private benefit, we have external benefit Cost benefit MPC External Benefit MSB MPB social optimum output Output Qp Qs
5. Positive Externalities Because of the external benefit, marginal social benefit is over marginal private benefit The social quantity demand Qs Qp < Qs Market Failure Deadweight loss of externality / Welfare loss Cost benefit MPC MSB MPB social optimum output Output Qp Qs
6. Positive Externalities Government can implement subsidy to solve this situation, but how much subsidy? Cost benefit Deadweight loss of subsidy MPC Subsidy per unit MSB Subsidy paid MPB social optimum output Output Qp Qs
8. Negative Externalities Here is the graph present cost and benefit of producing steel. Without considering externality, quantity is at Qp. Cost benefit MPC MPB Output Qp
9. Negative Externalities However, producing steel causes more cost to society Beside private cost, we have external cost Cost benefit MSC MPC External Cost MPB Output Qp
10. Negative Externalities Because of the external cost, marginal social cost is over marginal private cost The social quantity demand Qs Qp > Qs Market Failure Cost benefit MSC Deadweight loss of externality / Welfare loss MPC MPB social optimum output Output Qp Qs
11. Negative Externalities Government can implement tax to solve this situation, but how much tax? (Let’s say it’s fixed tax) Cost benefit MSC MPC Tax per unit Tax Revenue Deadweight loss of tax MPB social optimum output Output Qp Qs
12. That’s how I understand externalities graphs… Please help me understand the problem better by answering my questions written in Notes, or send me feedback to my blog www. http://istudyecon.blogspot.com/ Thank you so much for your time
Why the green triangle is deadweight loss? I don’t know. I cannot find any explanation
Deadweight loss caused by externalities (last slide) & deadweight loss caused by subsidy (this slide) are different 1) Why I shift MPC based on external benefit at Social Optimum Output, not external benefit at private quantity?Because what you want is quantity at Social Optimum Output. Subsidy you implement is also to achieve this quantity. Another word, your subsidy is to shift MPC to somewhere so that it cut MPB at quantity = Social Optimum Output.2) Is it realizable? Does textbook explain in the same way?Answer: My graph doesn’t contradict 6P, Parkin book and some websites so I think it’s fine However, I haven’t found their explanation so I explain it in my way
Why the green triangle is deadweight loss? I don’t know. I cannot find any explanation How do they come up with that triangle? :-< …huhu… Yes I’m crying
Deadweight loss caused by externalities (last slide) & deadweight loss caused by tax (this slide) are different 1)Why I shift MPC based on external benefit at Social Optimum Output, not external benefit at private quantity?Answer: Because what you want is quantity at Social Optimum Output. Tax you implement is also to achieve this quantity. Another word, your tax is to shift MPC to somewhere so that it cut MPB at quantity = Social Optimum Output.2) Is it realizable? Does textbook explain in the same way?Answer: My graph doesn’t contradict 6P, Parkin book and some websites so I think it’s fine However, I haven’t found their explanation so I explain it in my way
Why the green triangle is deadweight loss? I don’t know. I cannot find any explanation
Why the green triangle is deadweight loss? I don’t know. I cannot find any explanation How do they come up with that triangle? :-< …huhu… Yes I’m crying
