Question

Suppose that flu shots create a positive externality equal to $12 per shot. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

Answer 1

Question:

Suppose that flu shots create a positive externality equal to $12 per shot. Further suppose that the government offers a $5 per shot subsidy. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

a. They are equal.

b. The equilibrium quantity is greater than the socially optimal quantity.

c. The equilibrium quantity is less than the socially optimal quantity.

d. There is not enough information to answer the question.

Answer:

c) The equilibrium quantity is less than the socially optimal quantity.

Step-by-step explanation:

Consumers will most likely consume lesser amount and they will also bargain for a lower price when there is a positive externality. The social optimum where theee is an increase in supply but the consumers pay lessee price which makes the demamd and supply to increase and it causes the social optimum quantity to sharply increase sharp increase. In order to produce social optimum 7 ($12-$5) more units of susbsidy are needed.

In this case, since flu shots create a positive externality equal to $12 per shot and the government offers a $5 per shot subsidy, to producers, the relationship between the equilibrum quantity and the socially optimal wuantity of flu shots produced will be that the equilibrium quantity is less than the socially optimal quantity.

Answer 2

b. The equilibrium quantity is greater than the socially optimal quantity

Step-by-step explanation:

When a positive externality is present, the market produces less than the socially optimal quantity of the good or service.

Equilibrium quantity is when there is no shortage or surplus of a product in the market. Supply and demand intersect, meaning the amount of an item that consumers want to buy is equal to the amount being supplied by its producers. In other words, the market has reached a perfect state of balance as prices stabilize to suit all parties.

Since at positive externality, the market produces less than the socially optimal quantity, this implies that the the equilibrium quantity is greater than the socially optimal quantity