(Scenario: Private and External Benefits)Use Scenario: Private and External Benefits.The community decides that the marginal benefit to external parties from lawn upkeep is $15 and that it is important to maintain the socially optimal number of lawn upkeep hours.To achieve this goal,the community will: Scenario: Private and External Benefits
A small community finds that tidy lawns and neighborhoods provide both private and external benefits.They determine that the marginal private benefit (MPB)of lawns can be represented by the equation MPB = 50 - 0.5Q,where Q is the number of hours spent on keeping lawns tidy.The marginal private cost (MPC)of such lawn upkeep is represented by the equation MPC = 0.5Q,where Q is again the number of hours engaged in lawn upkeep.
A)require community lawn service of 45 hours.
B)subsidize everyone who contributes to lawn upkeep with a payment of $15.
C)implement a Pigouvian lawn tax of $65.
D)provide no additional funds to lawn upkeep.

Question

Quizplus · Accepted Answer

The socially optimal level of lawn upkeep is where the marginal social benefit (MSB) equals the marginal social cost (MSC). In this scenario, there are external benefits to keeping lawns tidy, which means that the MSB is greater than the MPB. Therefore, the socially optimal level of lawn upkeep is greater than the level where MPB equals MPC. To achieve the socially optimal level, the community could subsidize everyone who contributes to lawn upkeep with a payment of $15, which would increase the MPB and encourage more lawn upkeep. This subsidy would shift the MPB curve upward, and the new equilibrium level of lawn upkeep would be where the new MPB curve intersects the MPC curve.