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 following 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 following equation: MPC = 0.5Q, where Q is again the number of hours engaged in lawn upkeep.
(Scenario: Private and External Benefits) Look at the scenario Private and External Benefits.The community decides that given all the benefits of lawn upkeep, it is important to maintain the socially optimal number of lawn upkeep hours.In order to achieve this, the community will:
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 occurs where the marginal social benefit equals the marginal social cost. Since the external benefits are not included in the private benefit, a subsidy can help align private incentives with the social optimum. A subsidy of $15 would encourage more lawn upkeep by effectively increasing the marginal private benefit.

Scenario: Private and External Benefits a Small Community Finds That