Post by: jacob816 on Nov 23, 2022
The graph shows the market for flu shots.
Assume that P1=$2.00, P2=$2.50, P3=$5.75, P4=$8.00, P5=$9.75, P6=$10.50, P7=$12.75, Q1=160, and Q2=425 and that D1 represents the marginal private benefit of flu shots and D2 represents the marginal social benefit of flu shots. At the efficient equilibrium, ________ flu shots are sold at a price of ________. If the government determines that flu shots create a positive externality, it can ________ (tax/subsidize) flu shots by an amount equal to ________, meaning consumers pay a price of ________.
◦ 425, $8.00, tax, $5.50, $11.25
◦ 160, $5.75, subsidize, $4.00, $5.75
◦ 425, $8.00, subsidize, $5.50, $2.50
◦ 160, $5.75, tax, $4.00, $13.75
Post by: hiyayyay on Nov 23, 2022
Flu shots represent a positive externality and the market produces a quantity that is less than the efficient amount. Because D1 represents the marginal private benefit, and D2 represents the marginal social benefit, the intersection of S with D2 can be used to determine the efficient equilibrium, where quantity is 425 and price is $8.00.
Governments can provide a subsidy for a positive externality to shift the demand curve upward and to the right (to match the marginal social benefit). To make the correct adjustment, the subsidy must equal the difference between the two demand curves P4 - P2 = 8.00 - 2.50 = $5.50.
If $8.00 is the price at the efficient equilibrium, and the government subsidizes this price by $5.50 then consumers pay $8.00 - $5.50 = $2.50.