Consider the market for tires. Assume that cotton candy exhibit positive externalities. a. Draw a graph of the market for tires, clearly labeling the demand curve, the social-value curve, the supply curve, and the social-cost curve. Note, two of these curves will be the same. b. Clearly label the market equilibrium level of output and the socially optimal level of output. c. Clearly label deadweight loss.
Consider the market for tires. Assume that cotton candy exhibit positive externalities.
a. Draw a graph of the market for tires, clearly labeling the demand curve, the social-value curve, the supply curve, and the social-cost curve. Note, two of these curves will be the same.
b. Clearly label the
c. Clearly label deadweight loss.
d. If the external benefit is $300 per tires, describe a government policy that would yield the optimal quantity.
An externality refers to a cost or benefit that arises from a market transaction to a third party who did not choose to incur that cost or accrue that benefit. It is considered a positive externality when a benefit arises to a third party who is not an original participant of the economic activity in consideration.
The market for tires which creates a positive externality will be represented as follows:
The private market equilibrium is represented by E whereas the socially efficient equilibrium is represented as E*.
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