MICROECONOMI
SUBSIDIES, MAX/
PRIC
REGULATIO
, SUBSIDIES
• Utilised for goods with positive externalities
in consumption by lowering costs for
producers (and therefore lowering prices).
• MSB > MPB as there are external benefits for
consuming the good.
• Product is under-produced and under-
consumed because the MEB (shown by ac) is
not included in ungained welfare of area abc
i.e. allocative inefficiency.
To achieve SOE
• Subsidy needs to equal bd (represents MEB at
SOE).
• d: max price consumers are willing to pay at .
• b: production cost at .
• Difference overcome by subsidy and so
internalises the positive externality increases
in Q and P to SOE (shown by b).
SUBSIDIES, MAX/
PRIC
REGULATIO
, SUBSIDIES
• Utilised for goods with positive externalities
in consumption by lowering costs for
producers (and therefore lowering prices).
• MSB > MPB as there are external benefits for
consuming the good.
• Product is under-produced and under-
consumed because the MEB (shown by ac) is
not included in ungained welfare of area abc
i.e. allocative inefficiency.
To achieve SOE
• Subsidy needs to equal bd (represents MEB at
SOE).
• d: max price consumers are willing to pay at .
• b: production cost at .
• Difference overcome by subsidy and so
internalises the positive externality increases
in Q and P to SOE (shown by b).
