chapter 4 externalities activity (demand curve)

What is the market equilibrium price of a pound of Booming Berries?

The market equilibrium price is found where the demand and supply curves intersect at $60 per pound.

What is the market equilibrium quantity of Booming Berries exchanged?

50 (thousands of pounds)

Stating that consuming Booming Berries creates immunity to the common cold.

With fewer people getting cold and therefore less of the common cold going around, even some people who don't eat Booming Berries or produce the berries will benefit from not getting sick.

The market for Booming Berries has an impact on people who do not buy or sell the berries.

Is it a positive externality or a negative externality?

Positive externality

Explain positive externality

When a positive externality exists, there is an external marginal benefit.

What is the estimate of this external marginal benefit of Booming Berries?

$20 per thousand pounds

If we wanted to account for this external marginal benefit in the competitive Booming Berries market, would this affect the demand or supply curve?

The demand curve

Is the external marginal benefit added to the demand curve or subtracted?

An external marginal benefit is added to the competitive demand curve, shifting it upward by $20, so that at each level of of output is now valued $20 more.

It is added to the demand curve, which shifts the demand curve upwards by $20.

Socially efficient means

The equilibrium price and quantity reflect all of the benefits - or costs - associated with the sale of the good.

In the case of Booming Berries, is the socially efficient market price greater or less than $60 per pound?

The socially efficient price is greater than $60.

What about the socially efficient market quantity? Is it greater or less than 50 thousand pounds?

Greater than 50 thousand pounds.

When the external marginal benefit is added to the competitive demand curve, the demand curve sits right and the socially efficient (equilibrium) quantity is greater than the competitive market equilibrium quantity.

If the external marginal benefit from Booming Berries is $20 per each thousand pounds, what is the socially efficient price per pound?

$70 per pound.

The $20 external marginal benefit is added to the competitive market demand, shifting it to the right by 20 units.

If the external marginal benefit from Booming Berries is $20 per each thousand pounds, what is the socially efficient quantity (in thousands)?

60 (in thousands).

The $20 external marginal benefit is added to the competitive market demand, shifting it to the right by 20 units.

The socially efficient demand curve will intersect the market supply curve at a price of $70 per pound and a quantity of 60.

Summarize the relationship between the competitive market equilibrium price and the socially efficient equilibrium price when there is a positive externality in the market?

The socially equilibrium efficient price is greater than the competitive market equilibrium price.

How about the equilibrium quantity?

The socially equilibrium quantity is greater than the competitive market equilibrium quantity.

How can our listeners support the Booming Berries market.

Lobby government officials to subsidize the sale of Booming Berries.

A tax will shift the supply curve to the left if the lobby government officials to tax the sale Booming Berries.