Question

Consider a market where production of a type of electrical car generates a positive externality. In the market equilibrium, too many of the cars are being produced. too few of the cars are being produced. car manufactures are not maximizing profit. there is no deadweight loss.

Answer 1

In a market for a type of electric car with a positive externality, too few cars are being produced due to car manufacturers not considering the additional benefits to society. The government can address this market failure by subsidizing production to increase the equilibrium quantity to the socially optimal level.

Step-by-step explanation:

In the market equilibrium for a type of electric car that generates a positive externality, too few cars are being produced. This is because car manufacturers are only considering their private costs and benefits and not accounting for the additional benefits to society.

As a result, they are not maximizing social welfare and the market produces less than the socially optimal quantity of cars. To correct this market failure, the government can intervene by subsidizing the production of these cars, making them cheaper to produce and increasing the equilibrium quantity to match the socially optimal level, Q_social.