Question

Let’s assume as city planner you’ve been tasked with the goal of planting more trees in your community.

A. Explain which option would be more successful in your goal: a tax or a subsidy.

B. Draw a graph with the marginal social benefit, marginal social cost, and private cost (go ahead and estimate one). Show the private level of trees planted and the socially optimal level of trees planted. Put Price on the vertical axis and the number of trees planted on the horizontal axis. Hint: this is the opposite of what we did in class. Instead of focusing on a bad (pollution), we want to focus on a good (trees).

Answer 1

Ans) Positive externality is when the bystander bears the benefit of any activity. In positive externality social benefit is more than the private benefit and hence the good is underconsumed. To increase the quantity, government gives subsidy. Subsidy decreases the price and increases the quantity.

Here planting trees will yield positive externality as trees provide oxygen, are soothing to eyes, provide shade, fruit etc. To increase the plantation of tree, government will give subsidy equal to external benefit, to bring the quantity equal to socially optimal quantity.

P1 MSC External benefit YPB Socially optimal quantity Market quantity

After subsidy PT subşidy

Qm is private level of tree planted, which is less than socially optimal level of trees (Qs). To increase the plantation of trees, government will give subsidy.