Page 367 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes intersects at point E and produced OQ. But this is not the optimum social limit of production.
To encourage the production of commodity from which positive externalities are obtained, the
government provides the consumer subsidy equivalent to B by which the demand curve D moves
upwards and becomes D . By this, the quantity of the produced commodity increases from OQ
1
to OQ which is the social optimum limit. Thus, to bring equality in social and personal costs
1
and benefits, tax and subsidies are effective measures.
Fig. 24.1 Fig. 24.2

S 1 B
E 1 S S
Price E Price E E 1
T D D
1
D
O Q Q O
1 Q Q 1
Quantity Quantity

3. Public goods: If the number of probable consumers of a public goods is more, then only with
the assistance of public authority can the commodity be distributed among consumers.
Because the benefits of common commodities are undivided, the government should adopt
such measures that the cost of common commodities can be distributed among public so that
each person can use it and thus lead a better life. Apart from this, if the probable benefit of
public goods is greater than its cost, in which the government’s imputed cost of expanding
the workable is mixed then this, is within law of social welfare in the area of public activity.
4. Unitization: Another measure is amalgamation of externalities in production. When the firms
are established in oil production in the same area, then drilling and pumping are done from it
from which there are diseconomies of production. With the merger of firms and without the
production diseconomies, oil can be produced very effectively.
5. Property rights: Prof. Ronald Coase has stated that the main source of externalities is the
inappropriate assignment of the property rights. According to him if property rights are clearly
defined then the affected person would adopt principle for amalgamation of externalities.
Therefore, it is necessary that property rights are marketable so that personal dealings can be
done. According to him the market may be goes into Pareto Optimum.

Economic equality makes greater to the welfare.

24.4 Pigou’s Concept of Ideal Output

Pigou’s concept of ideal output is related to the highest level of welfare in economic methodology. By
Pigou the national dividend is considered an indicator of welfare. According to Pigou, when the price of
marginal social products is equal in all possible uses, then the national profit gets maximum. Where there

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