Scenario 10-2 The demand curve for restored historic buildings slopes downward a

Question

Scenario 10-2 The demand curve for restored historic buildings slopes downward and the supply curve for restored historic buildings slopes upward. The production of the 50th restored historic building entails the following: • a private cost of $800,000; • a private value of $650,000; • a social value of $800,000. Refer to Scenario 10-2. Could the government impose a tax or provide a subsidy to move the market to the social optimum? If your answer is “Yes,” should it be a tax or should it be a subsidy?

Explanation / Answer

In this scenario, the private value of restoring the historic building is less than the social value arising out of it.

The difference between these two values is the value of positive externality.

Due to positive externalities, the government would provide subsidies in order to avoid the market failure.

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