Moldavia is a small country that initially does not trade with the rest of the w

Question

Moldavia is a small country that initially does not trade with the rest of the world. Nut N' Honey Farms has a monopoly on the production of peanut brittle in Moldavia. The following information describes Nut N' Honey's monopoly status in the peanut brittle market in Moldavia:

Demand: P = 12 - QD

Marginal Revenue: MR = 12 - 2*Q

Total Cost: TC = 12 + (1/2)*Q^2

Average Total Cost: ATC = 12 / Q + (1/2)*Q

Marginal Cost: MC = Q

So I figured this:

A new report from the Moldavian finance minister finds that peanut brittle consumption raises dental insurance costs throughout the country; they conclude, therefore, that the marginal social benefit of peanut brittle in Moldavia is actually:

MSB = 12 - 2*Q

Marginal private benefit of peanut brittle consumption continues to be given by the domestic D curve:

MPB = P = 12 - Q

So, the Question.

2. In light of this new report, the efficient quantity of peanut brittle in Moldavia is now...?

3. What is the DWL?

Q P MR TC ATC MC TR Profit 0 12 12 12 0 0 0 -12 1 11 10 12.5 12.5 1 11 -1.5 2 10 8 14 7 2 20 6 3 9 6 16.5 5.5 3 27 10.5 4 8 4 20 5 4 32 12 5 7 2 24.5 4.9 5 35 10.5 6 6 0 30 5 6 36 6 7 5 -2 36.5 5.2 7 35 -1.5

Explanation / Answer

1.

Since Nut N Honey farms is a monopoly, it will produce output till the point MR=MC.

As seen from the given data, MR=MC occurs at the point MR=MC=4 at Q*=4 units.

At Q*=4,

MSB = 12-2Q = 12-2(4) = 4

MPB = 12-Q = 12-4 = 8

Since MPB>MSB, there is a negative externality.

2.

Efficent quantity is the point where MC = MPB+MSB

That is, Q = (12-Q)+(12-2Q)

Or, Q = 24-3Q

Or, Q = 6 units.

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