Thursday, December 13, 2007

Externalities and DWL


Class 22, top of pg 4 - example on positive production externality. The DWL triangle in this case doesn't seem to be pointing towards the Qe. I'm also unclear what the DWL represents in this case.


You are correct. The DWL should be the other triangle. Luckily, in these examples both of the triangles are the same size. With a positive externality, DWL arises because there are units that the market isn't producing that would be beneficial to society, since for these units the Marginal Social Benefit outweighs the Marginal Social Cost. Think of it as foregone opportunity due to the fact that it didn't specifically benefit producers and consumers of the product.

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