The private demand for drive-in movies is given by P = 20 - Q. The industry marginal cost of showing drive-in movies is given by MC = Q. a. Drive-in movies can be viewed imperfectly from outside the fence. The external marginal benefits (EMB) received by such viewers are given by EMB = 5-0.25Q. Graph the external marginal benefit curve, and then use that information to graph the social demand (SD) curve. Price SD 25 EMB 24 23 22 21 20 19 18 D 17 16 15 15 14 13 12 11 10 9 8 76543210 MC 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Quantity of drive-in movies ▲ DWL b. Suppose that all drive-in movies are nationalized and shown for the public good. The Movie Czar chooses the price and quantity of movies that bring the greatest benefit net of costs to all viewers, regardless of the vantage point from which they view the movie. The optimal quantity of drive-in movies is now approximately , and the optimal price is

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Market Failure Analysis

To understand Market failure, we need to first understand welfare economics. An Italian economist, Vilfredo Pareto stated that allocation of resources in an efficient manner such that an economic change, which harms no one and makes someone better off, indicates an increase in social welfare. It is also called Pareto Optimality, where resources cannot further be reallocated without harming one. This does not apply to those economic changes, which harm some and benefit others. social welfare increases if the utility of any of its members' increases and none decrease in the economy.