The graph below shows conditions in a perfectly competitive market in which there is some sort of externality. In this market, a consumer purchases at most one unit of the good. There are many such consumers, and they have different maximum willingnesses to pay. Assume that the graph is drawn to scale.
a) What type of externality is present in this market: positive or negative?
b) What is the maximum level of social surplus that is potentially attainable in this market?
c) What is the deadweight loss that arises in a competitive equilibrium in this market?
d) Suppose a subsidy is given to producers: What is the magnitude of the subsidy per unit that would enable this market to attain the socially efficient outcome?
For the remaining questions, please indicate whether the following government interventions would increase social efficiency relative to the competitive equilibrium outcome with no government intervention, decrease social efficiency, or keep it unchanged:
e) A subsidy per unit equal to 0F given to consumers who purchase the good.
f) The government replaces private sellers and offers the good at a price of zero. (Assume that government has no inherent cost advantage or disadvantage relative to private producers. Assume, too, the government's cost of production is financed by levying taxes.)
g) The government imposes a price ceiling that sets a maximum price for the good equal to 0D.
h) The government imposes a tax equal to NR on consumers who do not purchase the good.