Evaluate corrective taxes, subsidies, regulation, property rights, and private negotiation by tracing output toward the social optimum and measuring welfare effects.
Anderson Company is a typical firm that manufactures Good G in a constant-cost, perfectly competitive market. Anderson Company is currently earning positive economic profit.
Assume the production of Good G creates benefits for third parties.
The government takes an action that corrects the externality in the market for Good G. As a result of the government's action, does total economic surplus increase, decrease, or stay the same? Explain.
Begin your response to this question at the top of a new page in the separate Free Response booklet and fill in the appropriate circle at the top of each page to indicate the question number.
State that total economic surplus will increase and explain with ONE of the following:
1 point
- The quantity produced will increase to the allocatively efficient quantity.
- Deadweight loss will decrease to $0.
- The marginal private cost will equal the marginal social cost, causing the externality to be internalized.
Total for part (d) for question 1 10 points