Market Regulation: External Benefits and Subsidies

This lecture discusses the dynamics of a perfectly competitive market for a normal good, focusing on the equilibrium price and quantity. The instructor presents a scenario where each unit purchased generates external benefits not considered by buyers. The lecture explores how to find the socially optimal quantity by incorporating these external benefits into the market analysis. The instructor explains the concept of willingness to pay and how it changes with the introduction of a subsidy for buyers. The impact of this subsidy on market equilibrium is analyzed, showing how it can lead to a higher quantity of goods purchased and a new equilibrium price. The lecture also examines the distribution of benefits between buyers and sellers, highlighting that sellers often benefit more from subsidies. Finally, the instructor discusses the implications for third parties who experience a loss of external benefits due to the subsidy, emphasizing the importance of understanding the overall impact of market interventions.