Homework Answers
Answer:
Market equilibrium occurs where MPB = MPC (private demand = private supply)
80 - Q = 8 + 2Q
72 = 3Q
Q = 24 units
P = $56 per unit
There are positive consumption externalities so that MSB = 80 - 0.5Q
Socially efficient equilibrium has MSB = MPC
80 - 0.5Q = 8 + 2Q
72 = 2.5Q
Q = 28.8 units
P = $65.60 per unit
Under consumption since socially efficient quantity is more than private quantity
DWL = 0.5*(68 - 56)*(28.8 - 24) = $28.80
For this case there should be a subsidy because there is an underconsumption and production and consumption should be encouraged
Size of the subsidy = difference in MSB and MPB at social quantity = 65.60 - 51.20 = $14.40 per unit
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