Math / Data & Statistics

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This graph shows the marginal social cost (MSC), marginal private benefit (MPB), and the marginal social benefit) associated with the market for snizzles.
What type of market failure does this graph demonstrate? Positive Externality $\square$ How much is produced in the market without government intervention? $\square$ How much is produced in the market with government intervention, assuming the market failure is eliminated? 12 $\square$ Calculate the dollar value of the externality per unit. 4 $\square$ Calculate the deadweight loss associated with this market failure. 8 $\square$

Studdy Solution

STEP 1

What is this asking? This graph shows us the costs and benefits of making "snizzles," and we need to figure out what's wrong with the market, how many snizzles are made, how many should be made, and how much this market inefficiency is costing society. Watch out! Don't mix up social and private benefits/costs!
Social means everyone, while private means just the people directly involved.

STEP 2

1. Identify the Market Failure
2. Find the Market Equilibrium Quantity
3. Find the Socially Optimal Quantity
4. Calculate the Externality Value
5. Calculate the Deadweight Loss

STEP 3

The graph shows MSB > MPB.
This means there's a positive externality!
Making snizzles benefits not just the buyers, but other people too!

STEP 4

The market produces where MPB meets MSC.
On the graph, that's at a quantity of 8.

STEP 5

The best quantity for society is where MSB and MSC meet.
The graph shows this happens at a quantity of 12.

STEP 6

At the market quantity of 8, the MSB is $\$14$ and the MPB is $\$12$ .

STEP 7

The difference, $\$14 - \$12 = \$2$ , is the externality value per snizzle.
The problem states the externality is $\$4$ , which is incorrect.

STEP 8

Deadweight loss is the value lost because the market isn't producing the best quantity.
It's the triangle between MSC, MSB, and the market quantity.

STEP 9

The base of the triangle is the difference in quantities: $12 - 8 = 4$ .

STEP 10

The height of the triangle is the externality value per snizzle, which we found to be $\$2$ .

STEP 11

The area of a triangle is $\frac{1}{2} \cdot \text{base} \cdot \text{height}$ .
So, the deadweight loss is $\frac{1}{2} \cdot 4 \cdot \$2 = \$4$ .
The problem states the deadweight loss is $\$8$ , which is incorrect.

STEP 12

Market Failure: Positive Externality Market Quantity: 8 Socially Optimal Quantity: 12 Externality Value: \$2 Deadweight Loss: \$4

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Studdy Solution

STEP 1

STEP 2

1. Identify the Market Failure
2. Find the Market Equilibrium Quantity
3. Find the Socially Optimal Quantity
4. Calculate the Externality Value
5. Calculate the Deadweight Loss

STEP 3

The graph shows MSB > MPB.
This means there's a positive externality!
Making snizzles benefits not just the buyers, but other people too!

STEP 4

The market produces where MPB meets MSC.
On the graph, that's at a quantity of 8.

STEP 5

The best quantity for society is where MSB and MSC meet.
The graph shows this happens at a quantity of 12.

STEP 6

At the market quantity of 8, the MSB is $\$14$ and the MPB is $\$12$ .

STEP 7

The difference, $\$14 - \$12 = \$2$ , is the externality value per snizzle.
The problem states the externality is $\$4$ , which is incorrect.

STEP 8

Deadweight loss is the value lost because the market isn't producing the best quantity.
It's the triangle between MSC, MSB, and the market quantity.

STEP 9

The base of the triangle is the difference in quantities: $12 - 8 = 4$ .

STEP 10

The height of the triangle is the externality value per snizzle, which we found to be $\$2$ .

STEP 11

The area of a triangle is $\frac{1}{2} \cdot \text{base} \cdot \text{height}$ .
So, the deadweight loss is $\frac{1}{2} \cdot 4 \cdot \$2 = \$4$ .
The problem states the deadweight loss is $\$8$ , which is incorrect.

STEP 12

Market Failure: Positive Externality Market Quantity: 8 Socially Optimal Quantity: 12 Externality Value: \$2 Deadweight Loss: \$4

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Studdy Solution

STEP 1

STEP 2

1. Identify the Market Failure2. Find the Market Equilibrium Quantity3. Find the Socially Optimal Quantity4. Calculate the Externality Value5. Calculate the Deadweight Loss

STEP 3

The graph shows MSB > MPB.This means there's a **positive externality**!Making snizzles benefits not just the buyers, but other people too!

STEP 4

The market produces where MPB meets MSC.On the graph, that's at a quantity of **8**.

STEP 5

The *best* quantity for society is where MSB and MSC meet.The graph shows this happens at a quantity of **12**.

STEP 6

At the market quantity of **8**, the MSB is $14\$14$14 and the MPB is $12\$12$12.

STEP 7

The difference, $14−$12=$2\$14 - \$12 = \$2$14−$12=$2, is the **externality value** per snizzle.The problem states the externality is $4\$4$4, which is incorrect.

STEP 8

Deadweight loss is the value lost because the market isn't producing the *best* quantity.It's the triangle between MSC, MSB, and the market quantity.

STEP 9

The base of the triangle is the difference in quantities: 12−8=412 - 8 = 412−8=4.

STEP 10

The height of the triangle is the externality value per snizzle, which we found to be $2\$2$2.

STEP 11

The area of a triangle is 12⋅base⋅height\frac{1}{2} \cdot \text{base} \cdot \text{height}21​⋅base⋅height.So, the deadweight loss is 12⋅4⋅$2=$4\frac{1}{2} \cdot 4 \cdot \$2 = \$421​⋅4⋅$2=$4.The problem states the deadweight loss is $8\$8$8, which is incorrect.

STEP 12

Market Failure: **Positive Externality** Market Quantity: **8** Socially Optimal Quantity: **12** Externality Value: **\$2** Deadweight Loss: **\$4**

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1. Identify the Market Failure
2. Find the Market Equilibrium Quantity
3. Find the Socially Optimal Quantity
4. Calculate the Externality Value
5. Calculate the Deadweight Loss

The graph shows MSB > MPB.
This means there's a positive externality!
Making snizzles benefits not just the buyers, but other people too!

The market produces where MPB meets MSC.
On the graph, that's at a quantity of 8.

The best quantity for society is where MSB and MSC meet.
The graph shows this happens at a quantity of 12.

At the market quantity of 8, the MSB is $\$14$ and the MPB is $\$12$ .

The difference, $\$14 - \$12 = \$2$ , is the externality value per snizzle.
The problem states the externality is $\$4$ , which is incorrect.

Deadweight loss is the value lost because the market isn't producing the best quantity.
It's the triangle between MSC, MSB, and the market quantity.

The base of the triangle is the difference in quantities: $12 - 8 = 4$ .

The height of the triangle is the externality value per snizzle, which we found to be $\$2$ .

The area of a triangle is $\frac{1}{2} \cdot \text{base} \cdot \text{height}$ .
So, the deadweight loss is $\frac{1}{2} \cdot 4 \cdot \$2 = \$4$ .
The problem states the deadweight loss is $\$8$ , which is incorrect.

Market Failure: Positive Externality Market Quantity: 8 Socially Optimal Quantity: 12 Externality Value: \$2 Deadweight Loss: \$4