AP Microeconomics: Externalities

In positive externalities

MSC=MPC=S (looks like typical supply curve)

MSB and MPB=D are the lines intersecting

LOOK AT THE INTERSECTION OF Qs (MPB = MSC)

Qm is at MSB = MSC

UP FROM QS AND INTERSECTION WITH MSB is DWL

use other intersection (not used to find deadweight loss) to determine when tax or subsidy ends

Treat MPB and MSC/MPC as

respectively demand and supply

Qs > Qm

positive externality

Qs < Qm

negative externality

NEGATIVE EXTERNALITY

MSB = D in position of supply curve

S = MPC

MSC

Subsidy for positive externality

MPC = MSB

DOWN TO MPB

Tax for negative externality

MSC= MSB

DOWN UNTIL EQUALS MPC

Why does lump sump not work

one time cost, doesn’t account for future costs

Pp & Pc, for positive externalities

Pc → below, paying less

Pp → above, gets more

Pp & Pc for negative externalities

Pc → above, paying more

Pp → below, getting less

why would be less than socially optimal

marginal social cost/external cost none/cost would increase