Suppose that engineers have discovered a new production process for this product which results in a significant positive externality. As a result of the positive externality, for every given output level Marginal Social Value (MSV1) is now higher than consumer’s marginal willingness to pay (also known as the Demand Curve shown as D0 below). Keep in mind that the setting is still that of a monopoly. 1) Please indicate on the graph above, assuming an absence of any government intervention to correct the positive externality and adding any necessary curve(s): The monopoly price P1 and the monopoly quantity Q1 under the condition of the (uncorrected) positive externality. (Also indicate, for comparison purposes, the original monopoly price P0 and monopoly quantity Q0.) The Socially Optimal output, QSO1.
Suppose that engineers have discovered a new production process for this product which results in a significant positive externality. As a result of the positive externality, for every given output level Marginal Social Value (MSV1) is now higher than consumer’s marginal
1) Please indicate on the graph above, assuming an absence of any government intervention to correct the positive externality and adding any necessary curve(s):
- The monopoly
price P1 and the monopoly quantity Q1 under the condition of the (uncorrected) positive externality. (Also indicate, for comparison purposes, the original monopoly price P0 and monopoly quantity Q0.) - The Socially Optimal output, QSO1.
- The resulting Consumer Surplus CS1, the resulting
Producer Surplus PS1, and the size of Dead-Weight Loss DWL1 if there is such a loss. - (No need to show the economic profits earned by the monopolist and/or to add any curves necessary to graphically show such profits).
2) As it relates to your graph from Qu1, please explain in a narrative response of approximately two paragraphs (total) or less:
(a) How you determined the monopolist output level Q1 and price P1 when a positive externality was present. How do they compare to Q0 and price P0 you found in Question 7 in the absence of a positive externality (smaller, larger, the same) and why?
(b) How you determined the socially optimal output level QSO1 when a positive externality was present. How does QSO1 compare to the QSO you found in Question 7 in the absence of a positive externality (smaller, larger, the same) and why? How does QSO1 compare to the Q1 (monopolist’s output) you found in Question 7 (smaller, larger, the same) and why?
3) In the case that you’ve illustrated and narrated in Questions 1 and 2, what was the impact of a monopolist’s presence on a market with positive externalities? Could a
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