Post by: lingual on Nov 23, 2022
The graph shows the marginal cost (MC), the marginal benefit (MB), and the marginal social benefit (MSB) of getting a flu shot.
Assume that P1=$1.40, P2=$3.85, P3=$5.85, P4=$8.30, Q1=455 and Q2=740. This illustrates a ________ (negative/positive) externality. The government can achieve economic efficiency by imposing a ________ (subsidy/tax) equal to ________.
◦ negative, subsidy, $6.90
◦ positive, tax, $6.90
◦ negative, tax, $4.45
◦ positive, subsidy, $4.45
Post by: Htimsrs on Nov 23, 2022
Because the marginal social benefit is greater than the marginal benefit, the market for flu shots represents a positive externality.
To achieve an economic efficiency, the government can provide a subsidy for a positive externality equal to the marginal external benefit of the externality.
Remember, marginal social benefit (MSB) = marginal benefit (MB) + marginal external benefit (MEB)
At the economically efficient level:
MSB = MB + MEB
P4 = P2 + MEB
MEB = P4 - P2 = 8.30 - 3.85 = $4.45.
Therefore, the government can impose a subsidy of $4.45 to achieve economic efficiency.