📚 Learning Guide
Analyzing Market Equilibrium with Externalities
easy

Arrange the following steps to analyze market equilibrium with positive externalities: A) Identify the marginal social benefit, B) Determine the equilibrium quantity, C) Assess the deadweight loss, D) Consider government intervention through subsidies.

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Learning Path
Learning Path

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Choose the Best Answer

A

A → B → C → D

B

B → A → D → C

C

D → A → B → C

D

C → B → A → D

Understanding the Answer

Let's break down why this is correct

Answer

To analyze market equilibrium with positive externalities, we start by identifying the marginal social benefit, which reflects the overall benefit to society from a good or service. Once we understand these benefits, we can determine the equilibrium quantity, which is the amount of the good that is produced and consumed in the market without any external influences. After finding the equilibrium quantity, we assess the deadweight loss, which shows how much potential benefit is being lost because the market isn't producing enough of the good due to the positive externality. Finally, we consider government intervention through subsidies to encourage more production and consumption of the good, helping to align private benefits with social benefits. For example, if a new park increases property values and community well-being, the government might subsidize its maintenance to ensure more parks are built.

Detailed Explanation

First, we find the marginal social benefit, which shows the total benefit to society. Other options are incorrect because This option suggests starting with the equilibrium quantity; This option starts with government intervention.

Key Concepts

Market Equilibrium
Positive Externalities
Government Intervention
Topic

Analyzing Market Equilibrium with Externalities

Difficulty

easy level question

Cognitive Level

understand

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