Serbian_2000
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When would I use the externalities diagram when it is the supply and demand one, and the marginal (MSB/MSC/MPC/MPB) externalities?

Why are externalities marginally measured and which one would I use because in the book there are two types of each diagram.

Like for positive externalities in consumption there is MSB and MPB. But for the other diagram from positive externalities in consumption there is D1 Shifts out to D2?
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beachpanda
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The MSB/MSC etc diagram is the 'Externalities' diagram and shows the social benefit or social costs, of positive or negative externalities, in production or consumption, of a merit or demerit good.

It sounds like the other diagram is a normal supply and demand diagram which shows how you might go about fixing the above issue - I think what you were referencing is underconsumption of a merit good?

A government might want to stimulate consumption of the merit good (lets say it's education). To do so they could use advertising to inform people about the benefits of going to school. Or regulation to ensure that everyone under 18 has to attend school. Demand will then shift out (like you said it did) and the equilibrium will in theory move to the socially optimum level.

'In theory' meaning you could then argue reasons why that may not happen in your evaluation.

A better example would be underproduction. A government could implement a subsidy, which you could then show on a supply+demand diagram as supply shifting out.

Fairly sure that's correct - I'm learning too so you may want to double-check! :rolleyes:

(Original post by Serbian_2000)
When would I use the externalities diagram when it is the supply and demand one, and the marginal (MSB/MSC/MPC/MPB) externalities?

Why are externalities marginally measured and which one would I use because in the book there are two types of each diagram.

Like for positive externalities in consumption there is MSB and MPB. But for the other diagram from positive externalities in consumption there is D1 Shifts out to D2?
Last edited by beachpanda; 9 months ago
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