Consider a market where demand is P=10-2Q. There is a negative production extern

Question

Consider a market where demand is P=10-2Q. There is a negative production externality of $2.50/unit of consumption. Supply is equal to ??=??2.

a. What is market equilibrium?

b. What is the socially optimum quantity and price??

c. If the government uses a tax to get producers to internalize the externality what is the net price received by producers?

d. Calculate the total surplus at market equilibrium

e. Calculate the total surplus at social optimum equilibrium

f. Calculate the total surplus with the tax

Explanation / Answer

Consider a market where demand is p=10-2Q. There is a negative production externality of $2.50/unit of consumption. Supply is equal to p=Q/2.

What is the market equilibrium?
10-2Q= Q/2

Q= 10/2.5=4

P= 4/2=2

What is the social optimum quantity and price?
Now 10-2Q= Q/2+2.5

Q= 7.5/2.5=3

P= 10-2*3=4

If the government uses a tax to get producers to internalize the externality what is the nest price received by producers?

Price received by producers= 3/2= 1.5 only

Calculate the total surplus at the market equilibrium.

Surplus=

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.