ECON 304 Lecture Notes - Lecture 26: Demand Curve, Marginal Cost, Marginal Utility
23 Oct 2020
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Document Summary
Panel a shows the social demand curve in a market with positive consumption externalities whilst panel b shows the social supply curve in a market with negative production externalities. In both panels, m represents the market equilibrium. The socially optimal price and quantity is located where the social curves intersect and is represented by o. What is different in this market: coase"s conditions no longer apply. This is because the large number of buyers and sellers create high transaction costs: government intervention may be necessary to fix what the market cannot handle on its own. A subsidy can stimulate consumption by shifting the demand curve to the right. A subsidy equal to the marginal external benefit would shift the private demand curve to the right to the point where the new private demand curve is identical to the social demand curve. This can be done to ensure the socially optimal quantity is realised, point o.
