00:01
So let me sketch an externality for you to illustrate the right answer.
00:05
Let's draw a market, price and quantity.
00:07
Let's draw a demand curve or a marginal benefit curve, a supply curve, or a marginal cost curve.
00:15
And we have a positive externality.
00:19
So i want to draw, let's say, a good work, the social marginal benefit is greater than the private marginal benefit.
00:29
Right so this is my externality the benefits to society are greater than the benefits to the individual which is what we mean by an externality right it has positive benefits on third parties not involved with the transaction so smb here is going to be my social marginal benefit the benefit to society as a whole which is greater than the benefit to the individual so the market likes this quantity right people who are buying the good for themselves will equate their own marginal benefit with a price, right? i buy things up until it's no longer worth it for me.
01:02
But society wants to be here, where the benefits to society are equalized to the costs of society, right? so here, the market is going to be too low.
01:16
And that should hopefully be pretty intuitive.
01:18
This good is really nice.
01:20
When people buy it, it does good things for others.
01:23
So when people buy it, in general, more of it should be bought, right? this is a neat good that does good things...