Principles of Microeconomics / Unit 12 MIC 1103 worked example, 60 to 90 seconds
The Positive-Externality Market and the Subsidy
The idea
From demand, supply and an external benefit per unit, build the social benefit schedule by adding the spillover to what buyers will pay at each quantity. The market equilibrium is where private demand meets supply; the optimum is where social benefit meets supply, at a larger quantity. The remedy: a subsidy to buyers equal to the spillover lifts demand onto social benefit; at the optimum sellers receive the higher price and buyers pay it less the subsidy.
In practice
Worked example: buyers take one hundred thousand shots at ten dollars, ninety at fifteen, eighty at twenty, seventy at twenty-five and sixty at thirty; clinics supply sixty at ten, seventy at fifteen, eighty at twenty, ninety at twenty-five and one hundred at thirty. Private demand meets supply at twenty dollars and eighty thousand. Each shot protects others by ten dollars, so society values ninety thousand shots at twenty-five, where supply offers ninety thousand: the optimum. A ten-dollar voucher per shot lets buyers pay fifteen, at which they take ninety thousand, while clinics receive twenty-five. Ten thousand more shots are given.
Where people slip
The subsidy equals the spillover per unit, not the quantity gap; a smaller voucher moves the market part way. And the voucher costs the treasury nine hundred thousand dollars here; it is efficient only because it was set at the external benefit.
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