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Provide one example of a negative externality and draw a graph depicting the socially optimal quantity and the market quantity. Explain why this is a...

1.Provide one example of a negative externality and draw a graph depicting the socially optimal quantity and the market quantity. Explain why this is a market failure. Explain the similarities between a negative externality and a common resource.


2.Provide one example of a positive externality and draw a graph depicting the socially optimal quantity and the market quantity. Explain why this is a market failure. Explain the similarities between a positive externality and a public good.


3.Using your graphs for numbers 1 and 2 above, explain in which situation it would be appropriate to use a Pigouvian tax and explain how large the tax should be. Explain in which situation it would be appropriate to use a Pigouvian subsidy and how large the subsidy should be.

Top Answer

1) When an individual or firm making a decision does not have to pay the full cost of the decision, a negative externality... View the full answer

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1 comment
  • bravo!
    • a312463434
    • Jul 19, 2016 at 10:33pm

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