Answer to Question #285508 in Microeconomics for giahue

Question

Give a picture of Positive externalities on consumption: https://drive.google.com/file/d/1KitPcjAWw291BIcMJPsLMnqr7elbQ5-p/view?usp=sharing

Correct the explanation below to be correct and complete.

"Competitive market equilibrium is reached at the free market and Qe vaccination is carried out throughout the year. Because at this point, the marginal private benefit curve (MPB) of the health care facility is equal to the marginal social cost (MSC).

However, as noted above, vaccination has a marginal external benefit even for the unvaccinated, and this benefit is not taken into account by health care facilities.

From a social perspective, the marginal social benefit (MSB) equals marginal social cost (MSC). Thus, the quantity optimum immunization level is achieved at the social optimum, but not at Qe.

In the presence of positive externality, the market will always produce less than the socially optimal level. Without government regulation, society would suffer a welfare loss equal to the triangle."

Answer 1

Wages and rent are examples of private costs that businesses spend when producing goods and services to serve the market. Firms incur negative externalities of production, or costs that harm third parties, in the process of producing goods and services, but they do not pay these costs. Third parties, who are external to the market, pay for any unfavorable external costs in a free market, not the enterprises that create them. Those in society who are affected by negative production spillovers such as pollution and traffic congestion are not customers or producers, but they are nonetheless obliged to pay a price. The total of private and external costs equals the social costs associated with production (SC = PC + EC). The additional cost of producing one more unit of a good or service is the marginal private cost. The additional external cost of producing an extra unit of output is the marginal external cost. Thus, MSC = MPC + MEC. Thus, negative externalities of production result in the MSC curve being above and to the left of the MPC curve. The firm producing the good aims to maximize profits and as such does not take into account any external costs associated with producing the next unit of output. The profit maximizing firm sets quantity to Qe where the MSB = MPC. This is not the socially optimum level of output because this is where MSB = MSC, and factors of production are being misallocated