In the following cases, the markets are in equilibrium, but there are externalities. In each case, determine whether there is an external benefit or cost and estimate its size. Finally, decide between a tax or a subsidy as a simple way to compensate for the externality. Fill out the table that follows with your answers.

a. In the market for automobiles, the private benefit of one more small SUV is $20,000 and the social cost of one more small SUV is $30,000.

b. In the market for fashionable clothes, the marginal social benefit of one more dress per person is $100, and the marginal private benefit is $500. Bonus: Can you tell an externality story that makes sense of these numbers?

c. In the market for really good ideas, ideas that will dramatically change the world for the better, the private benefit of one more really good idea (from speaker’s fees, book sales, patents, etc.) is $1 million. 

The marginal social benefit is $1 billion. 

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Case a. SUVs b. Fashionable clothes c. Ideas External Cost or Benefit? Size of External Benefit (or cost if negative) Tax It or Subsidize It?