Question

Policymakers are provided data about the private and social benefits of a good being sold in the market. Quantity Private MB ($) Social MB ($) 4 6 9 5 4 7 6 2 5 7 0 3 What is the size of the externality? If the externality is positive, enter a positive number. If negative, make it a negative number.

Answer 1

Answer:

There is a positive externality worth $3.

Explanation:

Quantity                                   4 5 6 7

Private marginal benefit ($)   6 4 2 0

Social marginal benefit  ($)    9 7 5 3

The externality is found by calculating the difference between social benefit and private benefit.

Here, we see that each level of output, the social benefit is greater than the private benefit. So we can say that a positive externality exists in the market.

The externality is equal to

When quantity=4,

$(9-6)=$3

When quantity=5,

$(7-4)=$3

When quantity=4,

$(5-2)=$3

When quantity=4,

$(3-0)=$3

So, there is an externality worth $3.