Subsidies and reasons

for government
interventions
G10 Pre DP Economics
 Draw supply curve

If the quantity produced is:

- 10 units: the total cost is 20

- 20 units: the total cost is 60

- 30 units: the total cost is 120

- 40 units: the total cost is 200

 Draw demand curve

If the quantity demanded is:

- 10 units: the price is 5

- 20 units: the price is 4

- 30 units: the price is 3.5

- 40 units: the price is 2

 Add Demand to your
graph

• Estimate the equilibrium P* and Q*

based on your diagram
 Pollution = negative
production externality
• Imagine the factory is polluting.
• The more it produces the more it
pollutes
• Use the data in the next slides to draw
a new supply curve and keep the same
demand curve
• The supply curve that includes the
pollution cost is called the ‘Marginal
Social Cost’
 Draw the Marginal Social Cost

If the quantity produced is:

- 10 units: the total cost is 20 + 10 in pollution

- 20 units: the total cost is 60 + 10 in pollution

- 30 units: the total cost is 120 + 10 in pollution

- 40 units: the total cost is 200 + 10 in pollution

Subsidies

The government gives

Why would the
a $3 dollar subsidies
government give a
per unit: draw the
subsidy to a business?
new supply curve
Positive Production
externalities
A beekeeper produces honey, but as an external benefit, his bees
help to fertilise nearby fruit trees.

养蜂人生产蜂蜜，而作为一个外部好处，他的蜜蜂帮助受
附近果树授粉。

Search the advantages of pollination ( 传粉 )

 Draw the Marginal Social Cost

If the quantity produced is:

- 10 units: the total cost is 20 + (-5) in pollination

- 20 units: the total cost is 60 + (-5) in pollination

- 30 units: the total cost is 120 + (-5) in pollination

- 40 units: the total cost is 200 + (-5) in pollination

 Add Demand to your
graph

• Estimate the equilibrium P* and Q*

based on your diagram
Consumption
Negative
Externalities
•Consumption is about benefit:
consumers pay because they want
to derive a benefit
•However, the consumption of
some goods causes harm to other
people (like second-hand smoking)
•To show the real value of smoking
we need another curve called the
Marginal Social Benefit
 Draw the Marginal Social Benefit curve

If the quantity demanded is:

- 10 units: the price is 5 + (-1) in other people harm

- 20 units: the price is 4 + (-1) in other people harm

- 30 units: the price is 3.5 + (-2) in other people harm

- 40 units: the price is 2 + (-2) in other people harm

Find other
examples of •Find goods and service that inflicts
damages on people that are neither the
negative buyer nor the seller of the good (or
consumption service)
externalities
Postive
Consumption
externalities
• Sometimes the
consumption of a good
can result in a benefit for
people that are neither
buyer not consummer
• For in instance contagious
deseases ( 传染病 )
• To show the real value of
vaccination we need the
Marginal Social Benefit
 Draw the marginal social benefit

If the quantity demanded is:

- 10 units: the price is 5 + 1 in other benefit

- 20 units: the price is 4 + 2 in other benefit

- 30 units: the price is 3.5 + 3 in other benefit

- 40 units: the price is 2 + 4 in other benefit