Suppose you are the world’s only consumer of oil, which you buy in a competitive

Question

Suppose you are the world’s only consumer of oil, which you buy in a competitive market (Note: we want you to assume that you are a price-taker despite being the market’s only consumer). The marginal private benefit of your oil consumption is given by MB(x) = 64 2x/3, when you consume x units of oil.

Oil producers produce oil along a marginal cost curve described by MC(x) = 2x.

Your consumption of oil also generates a negative externality. The marginal damage of oil consumption on the rest of the world is described by: MD(x) = x^2/2

1. If there is no government intervention in the oil market, what quantity and price describe the private equilibrium?

2. Draw a well-labeled graph showing the demand, supply, and social marginal benefit curves for this market. Shade in the region that describes the deadweight loss associated from the private equilibrium.

3. What is the social loss associated from the last unit of consumption?

4. What is the socially optimal quantity of your oil consumption? 5. Briefly describe two government policies that achieve this level of consumption.

Explanation / Answer

Nash Equilibrium is a concept within game theory where the optimal outcome of a game is where there is no incentive to deviate from their initial strategy. More specifically, the Nash Equilibrium is a concept of game theory where the optimal outcome of a game is one where no player has an incentive to deviate from his chosen strategy after considering an opponent's choice. Overall, an individual can receive no incremental benefit from changing actions, assuming other players remain constant in their strategies. A game may have multiple Nash Equilibria or none at all.

Read more: Nash Equilibrium https://www.investopedia.com/terms/n/nash-equilibrium.asp#ixzz5SJEuLnRb
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