Ch08Figures - Ch 8 How Government Corrects Markets 5 Figure...

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Ch 8 How Government Corrects Markets 5 Figure 8.1 A Negative Externality in the Market for Gasoline The competitive equilibrium in the market for gasoline is a quantity of 2 billion gallons per month at a price of $2. The cost of the side-effects of burning gasoline, the marginal external cost, is equal to $5 - $2 = $3. Taking the full social cost of gasoline into account, too much is bought and sold in equilibrium. The efficient quantity of 1.6 billion gallons per month is the quantity where the marginal social cost is equal to the marginal benefit. The difference between the marginal social cost and marginal benefit for the excess production in the competitive equilibrium, the deadweight loss, gives the cost of the excess production. 4.50 Quantity of Gasoline (billions of gallons) 0 .4 .8 1.2 1.6 2.0 2.4 2.8 3.2 1.00 2.00 3.00 S (Marginal Private Cost) 4.00 D (Marginal Benefit) Marginal Social Cost Price ($) E 3.50 2.50 1.50 .50 5.00 marginal external cost = $5-$2 = $3 deadweight loss in equilibrium excess of marginal social cost over marginal benefit efficient quantity marginal social cost = marginal benefit
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Ch 8 How Government Corrects Markets 8 Figure 8.2 A Positive Externality in the Market for Flu Vaccines The competitive equilibrium in the market for flu vaccines is a quantity of 60 million doses of flu vaccines per year at a price of $20 per dose. The value of the beneficial side-effect of a person being vaccinated, the marginal external benefit, is equal to $45 - $20 = $25. Taking the full social benefit of being vaccinated against the flu into account, there are not enough people vaccinated in equilibrium.
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Ch08Figures - Ch 8 How Government Corrects Markets 5 Figure...

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