Page 784 - Krugmans Economics for AP Text Book_Neat

Tackle the Test: Free-Response Questions
1. The purchase of antivirus software by one person provides 2. The use of plastic water bottles creates external costs as the
benefits to other people because they are less likely to receive a result of plastic production, bottle transportation, litter, and
virus from the software purchaser. Draw a correctly labeled waste disposal. Draw a correctly labeled graph showing how the
graph showing how the market will determine the quantity of market will determine the quantity of water bottles purchased.
antivirus software purchased. On the same graph, show the On the same graph, show the marginal external cost, the
socially optimal quantity of antivirus software. List two socially optimal quantity of water bottles, and the size of a
different government policies that could be used to achieve the Pigouvian tax that could be used to achieve the socially optimal
optimal quantity of antivirus software. quantity of water bottles.

Answer (8 points)
Price,
marginal
social
benefit of
antivirus S
software
P MSB
O

P MKT E MKT
MSB

D

Q MKT Q OPT Quantity of
antivirus software
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

742 section 14 Market Failure and the Role of Gover nment