Lab
The Externality Graph
Each graph starts with a perfectly competitive market: marginal private benefit (the buyers' demand) and marginal private cost (the sellers' supply), crossing at the market outcome QM and PM. Name both lines and title both axes first. Then decide whether the outside effect comes from making the good or from using it, move a copy of that line up or down, and drag the round point to the socially optimal quantity QS.
Challenges
- In each situation, say whether the market produces too much or too little, and which way the price would have to move to fix it.
- Shade the deadweight loss on paper: which two lines bound it, and between which quantities?
- Which per-unit tax or subsidy would move the market to QS? Say who pays it or receives it, and how large it is per unit.