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Chapter 13: Problem 1

Do market demand curves reflect positive externalities? Why or why not?

Short Answer

Expert verified
In conclusion, market demand curves do not reflect positive externalities because they only account for the private benefits experienced by consumers, not the additional benefits experienced by third parties. This discrepancy between private and social benefits means that the market equilibrium does not represent the socially optimal level of output and leads to underproduction and underconsumption of the good or service with positive externalities.

Step by step solution

01

Define Market Demand Curve

A market demand curve is a graphical representation of the quantity of a product that consumers are willing and able to buy at various prices, holding all other factors constant. It usually slopes downward from left to right, indicating that as the price of a product decreases, the quantity demanded by consumers increases.
02

Understand Positive Externalities

Positive externalities are benefits that accrue to third parties not directly involved in the production or consumption of a good or service. In other words, they are the positive spillover effects of an economic activity. When there are positive externalities, the social benefits (i.e., the total benefits to society) of a good or service are greater than the private benefits.
03

Analyze the Market Demand Curve under Positive Externalities

In the presence of positive externalities, the market demand curve does not fully account for all the social benefits of a good or service. This is because it only reflects the private benefits that accrue directly to consumers from consuming a good or service. It does not take into account the additional benefits that accrue to third parties.
04

Illustrate the Market Equilibrium with Positive Externalities

When there are positive externalities in a market, the market equilibrium (the point at which the market demand curve intersects the market supply curve) does not represent the socially optimal level of output. At the market equilibrium, the social marginal benefit (SMB) of the good or service is greater than the private marginal benefit (PMB). This means that society would be better off if more of the good or service were produced and consumed. In other words, there is a deadweight loss associated with positive externalities due to the underproduction and underconsumption of the good or service.
05

Conclusion

In conclusion, market demand curves do not reflect positive externalities because they only account for the private benefits experienced by consumers, not the additional benefits experienced by third parties. This discrepancy between private and social benefits means that the market equilibrium does not represent the socially optimal level of output and leads to underproduction and underconsumption of the good or service with positive externalities.

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Most popular questions from this chapter

Becky and Sarah are sisters who share a room. Their room can easily get messy, and their parents are always telling them to tidy it. Here are the costs and benefits to both Becky and Sarah, of taking the time to clean their room: If both Becky and Sarah clean, they each spends two hours and get a clean room. If Becky decides not to clean and Sarah does all the cleaning, then Sarah spends 10 hours cleaning (Becky spends 0) but Sarah is exhausted. The same would occur for Becky if Sarah decided not to clean鈥擝ecky spends 10 hours and becomes exhausted. If both girls decide not to clean, they both have a dirty room a. What is the best outcome for Becky and Sarah? What is the worst outcome? (It would help you to construct a prisoner鈥檚 dilemma table.) b. Unfortunately, we know that the optimal outcome will most likely not happen, and that the sisters probably will choose the worst one instead. Explain what it is about Becky鈥檚 and Sarah鈥檚 reasoning that will lead them both to choose the worst outcome..

Name two public goods and explain why they are public goods.

Education provides both private benefits to those who receive it and broader social benefits for the economy as a whole. Think about the types of policies a government can follow to address the issue of positive spillovers in technology and then suggest a parallel set of policies that governments could follow for addressing positive externalities in education.

When residents in a neighborhood tidy it and keep it neat, there are a number of positive spillovers: higher property values, less crime, happier residents. What types of government policies can encourage neighborhoods to clean up?

Provide two examples of goods/services that are classified as private goods/services even though they are provided by a federal government.
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