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Question: Externalities: Demand: P = 100 – 2Q = MB Supply: P = 10 + 0.5Q = MC_p Find the equilibrium price and quantity and illustrate graphically. Suppose MC_E = 0.5Q. What happens to the marginal external cost (the marginal increase in damages from pollution) as more of the good is produced Find the marginal social cost MC_s = MC_p + MC_E. Illustrate this new cost curve on your graph. Find the socially optimal equilibrium price and quantity. Which area on the graph represents the net gain from moving to the socially optimal equilibrium point Do a welfare analysis numerically, before and after a Pigovian tax equal to the MC_E Work out the welfare gain of implementing the tax and confirm it is the (negative of the) deadweight loss on your diagram, i.e. Do a welfare analysis numerically, before and after a Pigovian tax equal to the MC_E.–Free Chegg Question Answer

Transcribed text From Image: Externalities: Demand: P = 100 - 2Q = MB Supply: P = 10 + 0.5Q = MC_p Find the equilibrium price and quantity and illustrate graphically. Suppose MC_E = 0.5Q. What happens to the marginal external cost (the marginal increase in damages from pollution) as more of the good is produced Find the marginal social cost MC_s = MC_p + MC_E. Illustrate this new cost curve on your graph. Find the socially optimal equilibrium price and quantity. Which area on the graph represents the net gain from moving to the socially optimal equilibrium point Do a welfare analysis numerically, before and after a Pigovian tax equal to the MC_E Work out the welfare gain of implementing the tax and confirm it is the (negative of the) deadweight loss on your diagram, i.e. Do a welfare analysis numerically, before and after a Pigovian tax equal to the MC_E.

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Answer:

Answer

(a) In equilibrium, Demand = Supply

100 – 2Q = 10 + 0.5Q

2.5Q = 90

Q = 36

P = 100 – (2 x 36) = 100 – 72 = 28

In following graph, equilibrium point is e1 with price P0, quantity Q0.

(b)

MCE = 0.5Q

So, as more is produced, Q increases and marginal external cost increases.

(c)

MCS = MCP + MCE = 10 + 0.5Q + 0.5Q = 10 + Q

In above graph, equilibrium is at point e2 with price P2 and quantity Q2.

(d)

Social optimality is obtained when MB = MCS

100 – 2Q = 10 + Q

3Q = 90

Q = 30

P = 100 – (2 x 30) = 100 – 60 = 40

NOTE: First 4 sub-questions are answered



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