x Turn on thread page Beta
 You are Here: Home

# Subsidy Impact on Positive Externalities (diagram) watch

1. Having trouble understanding this diagram on "the effect of a subsidy on supply and demand of a good with a positive externality" as it doesn't seem as though the optimized quantity that the good is being produced at is including the MSB.

Firstly, we have a realisation of the true worth of the good and how the current price is not reflecting the added social benefit this gap is A-B.

On the supply side of things, there is an increase in supply as the subsidy is negating a lot of the private cost which decreases the marginal cost of each unit for the firm. This allows them to produce more which in effect lowers the price from P1 - P2 .. however, what I am seeing is the current output point still involving the MPB curve. Surely, through pure logic, it actually should be including the the MSB as the MSB = MPB + MEB (marginal external benefit).

Therefore, shouldn't the optimized output point be this?

Any further help would be great, thanks
Attached Images

2. Just realised another thing, on my diagram (one in my book) it has MPC not MSC and MPC - Subsidy rather than MSC + Subsidy ... surely they cant be the same thing !
3. (Original post by Tom.Dunwoody)

Having trouble understanding this diagram on "the effect of a subsidy on supply and demand of a good with a positive externality" as it doesn't seem as though the optimized quantity that the good is being produced at is including the MSB.

Firstly, we have a realisation of the true worth of the good and how the current price is not reflecting the added social benefit this gap is A-B.

On the supply side of things, there is an increase in supply as the subsidy is negating a lot of the private cost which decreases the marginal cost of each unit for the firm. This allows them to produce more which in effect lowers the price from P1 - P2 .. however, what I am seeing is the current output point still involving the MPB curve. Surely, through pure logic, it actually should be including the the MSB as the MSB = MPB + MEB (marginal external benefit).

Therefore, shouldn't the optimized output point be this?

Any further help would be great, thanks

Hello there,

I think a solution to your problem is that there should only be one demand curve where (MPB = MSB).

So the socially optimal level of output would be P2 - Q2.

4. I know this may seem really stupid, but i'm pretty sure that that diagram is incorrect. There is no way the MPB can equal MSB in a positive externality. That is literally impossible. I'm fully willing to listen to a reason why. But I don't see why the government would even subsidize the firm if they are reaping the rewards of the MSB curve. It makes no sense at all (to me that is) ... ofcourse I could be wrong.

TSR Support Team

We have a brilliant team of more than 60 Support Team members looking after discussions on The Student Room, helping to make it a fun, safe and useful place to hang out.

This forum is supported by:
Updated: January 22, 2015
Today on TSR

### Boyfriend slept with someone else

...we were on a break

### Mum says she'll curse me if I don't go to uni

Poll
Useful resources

The Student Room, Get Revising and Marked by Teachers are trading names of The Student Room Group Ltd.

Register Number: 04666380 (England and Wales), VAT No. 806 8067 22 Registered Office: International House, Queens Road, Brighton, BN1 3XE