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Instructions

Answer the following questions. Please rewritethe questions and write in complete sentences and paragraphs. Remember that economics is a science and that we are concerned with describingwhat, how, and why behaviors occur,therefore it should be detailed enough to clearly convey the economic concepts, using the appropriate terminology. You should apply the material from this module and chapter and not the internet.

Assume that there is a positive externality in the market for organic bananas. The graph below shows the supply and demand curves for organic bananas.

1. What is the market equilibrium quantity and current market price?

2. What is the optimal quantity and price? Explain.

3. What should the government do in order to ensure the market produces the optimal

(efficient) quantity. Why and how big will the appropriate corrective action be?

4. As a result of the positive externality explain the possible outcomes both before and as a result of the appropriate corrective action.