Market Regulation: External Benefits and Subsidies

This lecture explores the concept of external benefits in a market, using the example of bicycles to illustrate how social benefits are not always considered by buyers. The instructor explains how external benefits lead to a shift in the demand curve, resulting in a new socially optimal quantity. By internalizing these benefits through subsidies, the market equilibrium is adjusted, impacting both buyers and sellers. The lecture delves into the calculation of consumer and seller surpluses, demonstrating how subsidies affect market outcomes and the distribution of surplus between buyers and sellers.