SOLUTION: . 3. Suppose the market demand function (expressed in liras) for a product is P = 80 - q, and the marginal cost (in liras) of producing it is MC = q, where P is the price of the

Question 1201785: .
3. Suppose the market demand function (expressed in liras) for a product is P = 80 - q,
and the marginal cost (in liras) of producing it is MC = q, where P is the price of the product and q is the quantity demanded and/or supplied.
(a) How much would be supplied by a competitive private market?
(b) Compute the consumer surplus and producer surplus generated by the market
equilibrium in part (a). Show that their sum is maximized if there are no externalities involved.
(c) Suppose that the production of this product generates negative environmental
externalities according to the external cost function EMC = q=2: Construct the
social marginal cost (SMC) and social marginal beneÖt (SMB) curves and Önd
the socially e¢ cient level of output in this market.
(d) Compute the level of the deadweight loss that is generated by the private market
due to the externality in part (c).
(e) If the government wishes to address the externality by using a pigouvian tax,
what would be the optimum amount of such a tax?
Answer by ikleyn(52909) (Show Source): You can put this solution on YOUR website!
.

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