The market for deodorant is characterized by the following:
QD = 12 - 2P
QS = 2P
P -- $/ounce of deodorant
Q -- ounces of deodorant
20.3. PS#4 - Part II-B - 20.3
Deodorant use benefits not only the user, but bystanders as well (!). Economists have estimated that these
external benefits amount to $2 /ounce.
Professor A advocates a full per ounce subsidy to consumers, reducing their price to zero, on the grounds
that the increase in externality benefits more than outweighs the distortion in the private deodorant
market.
Professor B, reacting to Professor A's plan, holds that society, on efficiency grounds, is better off with the
market outcome (no government intervention) than with the results of Professor A's policy.
From the standpoint of efficiency, which Professor is correct? Why? Be specific in your calculations, and use
a well-labeled diagram to show each Professor's equilibrium point.
Note: For this question, it might help to use the inverse forms of the demand and supply curves above. So,
feel free to use:
Demand: MPB = P = 6 - 1/2 QD
Supply: MPC = P = 1/2 QS
If Professor A's policy is adopted, the price consumers pay for deodorant will be:
A. $0/oz.
