1. Consider two markets, for good A and good B. In the...

1. Consider two markets, for good A and good B. In the market for good A there is no externality (externality is an example of preexisting distortions), but in the market for good B there exists a positive production externality. Using figures show and compare the deadweight losses in these two markets when a tax (same amount) is imposed on the producers of these two goods.

Transcript

00:01 So here we are talking about externalities, right? we have a graph.

00:03 Let me replicate that graph.

00:05 It is a graph between price, of course, and quantity, the same as always.

00:10 We have an upward slope in supply curve, and we have two curves.

00:14 We have a demand curve and a marginal social benefit.

00:18 So here, the positive externality is equal to the distance, right? ternality is equal to the vertical distance, right? for example, if i look right here, this point would be the private marginal benefit, but up here would be equal to the social marginal benefit.

00:44 So the vertical distance between these lines is the amount of the externality, and that vertical distance is 30, right? the deadweight loss here, well, let's think about what deadweight loss is.

00:58 Deadweight loss is lost benefits that occur by the market not producing.

01:07 Now, the key is that right here is the efficient point.

01:10 This is the efficient quantity that equates marginal social benefit with marginal cost.

01:16 But this here is the actual quantity that the private market would produce.

01:23 So here, this area is the home of the deadweight loss, and it's based upon the difference between the benefits and the costs.

01:36 Over this area, you can see that, for example, up here, we value as a society this unit at this price, but we only cost the height of the supply curve.

01:48 So this triangle a, right, is the amount of the deadweight loss, triangle a.

01:55 The difference between demand, sorry, the marginal social benefit and the marginal cost...

Question

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