AP_Krugman_Textbook

742 section 14 Market Failure and the Role of Government

Tackle the Test: Free-Response Questions

1. The purchase of antivirus software by one person provides
   benefits to other people because they are less likely to receive a
   virus from the software purchaser. Draw a correctly labeled
   graph showing how the market will determine the quantity of
   antivirus software purchased. On the same graph, show the
   socially optimal quantity of antivirus software. List two
   different government policies that could be used to achieve the
   optimal quantity of antivirus software.

Answer (8 points)

1 point:Vertical axis labeled “Price, marginal social benefit” or “Dollars per
unit,” horizontal axis labeled “Quantity of antivirus software” or “Q”

1 point:Upward-sloping supply (or equivalently, marginal cost) curve. (Note
that with no external costs, marginal private cost equals marginal social cost.)

1 point:Downward-sloping demand (or equivalently, marginal private benefit)
curve

1 point:The market quantity of antivirus software is found at the intersection of
supply and demand and shown on the horizontal axis.

1 point:Downward-sloping marginal social benefit curve drawn above demand
curve

1 point:The optimal quantity of antivirus software is found at the intersection of
supply and marginal social benefit and shown on the horizontal axis.

1 point:A Pigouvian subsidy equal to the marginal external benefit at the
socially optimal quantity

1 point:A government regulation requiring the optimal quantity of antivirus
software

S

D

MSB

O

Price,
marginal
social
benefit of
antivirus
software

Quantity of

antivirus software

QOPT

PMSB

PMKT

QMKT

EMKT

2. The use of plastic water bottles creates external costs as the
   result of plastic production, bottle transportation, litter, and
   waste disposal. Draw a correctly labeled graph showing how the
   market will determine the quantity of water bottles purchased.
   On the same graph, show the marginal external cost, the
   socially optimal quantity of water bottles, and the size of a
   Pigouvian tax that could be used to achieve the socially optimal
   quantity of water bottles.