Why are spillover costs and spillover benefits also called negative and positive externalities? Show graphically how…
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Question “Why are spillover costs and spillover benefits also called negative and positive externalities? Show graphically how…”
Why are spillover costs and spillover benefits also called
negative and positive externalities? Show graphically how a tax can
correct for a negative externality and how a subsidy to producers
can correct for a positive externality. How does a subsidy to
consumers differ from a subsidy to producers in correcting for a
positive externality?
Answer
-
Why are spillover costs and spillover benefits also
called negative and positive externalities? Spillovers usually are not intended. A spillover cost, in this context, is an overconsumption situation due to people neglecting the external social costs (Marignal private cost > Marginal Social cost). These are known as negative externalities.
A spillover benefir, on the other hand, is a positive externality. It occurs when the marginal social cost exceeds the marginal private cost. Third parties get more for the money they don’t pay. -
Show graphically how a tax can correct for a negative
externality and how a subsidy to producers can correct for a
positive externality.
To correct the spillover cost of the excess consumption, a tax equal to the external marginal cost (marginal social costs) is imposed. The quantity supply curve moves to the left and intersects the demand curve. Marginal social cost = Marginal personal cost. This is now socially optimal efficiency. The cost of production to firms increases, and output decreases.
[See graph down]
If a spillover benefit is provided, subsidies on goods to producers can cause a drop in the price of the good. This causes consumers to consume more. This increases the consumption of the consumers. [The cost of production decreases, and thus output rises]
[See graph below] -
How does a subsidy to consumers differ from a subsidy
to producers in correcting for a positive
externality?
A subsidy to consumers for correcting a positive externality would increase the price level. A subsidy to producers to correct a positive externality will lower the price level.
Conclusion
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