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Social Science Clinic => Economics => Topic started by: Tiffanyanne824 on Nov 23, 2022

Title: Externalities of ConsumptionThe graph shows the market for flu shots, which causes a positive ...
Post by: Tiffanyanne824 on Nov 23, 2022

Question 1

Suppose demand is Qd = 66 – P and supply is Qs = P. There is a constant negative externality of $6 per unit. What is the market equilibrium quantity? What is the economically efficient quantity?
◦ 30, 33
◦ 33, 36
◦ 30, 36
◦ 33, 30

Question 2

Externalities of Consumption

The graph shows the market for flu shots, which causes a positive externality due to impacts on herd immunity.
 
Assume that P1=$1.90, P2=$3.10, P3=$5.75, P4=$7.55, Q1=465, Q2=920, and Q3=1,480. The market equilibrium results in ________ (overproduction/underproduction) of flu shots by ________ units.
◦ underproduction, 1,015
◦ underproduction, 455
◦ overproduction, 455
◦ overproduction, 1,015
Title: Externalities of ConsumptionThe graph shows the market for flu shots, which causes a positive ...
Post by: jbsuccess1 on Nov 23, 2022

Answer 1

33, 30

Market equilibrium occurs where quantity supplied (Qs) equals quantity demanded (Qd).
Qs = Qd
P = 66 - P
2P = 66
P = 66/2 = $33
Qs = P = 33
Qd = 66 - P = 66 - 33 = 33

The economically efficient equilibrium, however, occurs where quantity demanded (Qd) equals quantity supplied adjusted for the negative externality.
In this example, the negative externality is $6 per unit, meaning it shifts the supply curve upward by 6 units.
Therefore, P = Qs + 6 or Qs = P - 6
Qs = Qd
P - 6 = 66 - P
2P = 66 + 6
P = (66 + 6)/2 = $36
Qs = P - 6 = 36 - 6 = 30
Qd = 66 - P = 66 - 36 = 30

Answer 2

underproduction, 455

Market equilibrium occurs where supply (MC) equals demand (MB).
In this example, at a price of P2 = $3.10 and a quantity of Q1 = 465.

The economically efficient equilibrium, however, occurs where supply (MC) equals the marginal social benefit (MSB) of flu shots.
In this example, at a price of P3 = $5.75 and a quantity of Q2 = 920.

Therefore, the market equilibrium results in underproduction of flu shots equal to