Question

Q_S = 2 P - 40

Q_D = 200 - 0.4 P

MEC = $100

MSB = 400 - 2.5 Q

What type of externality do these equations represent?

Positive externality in consumption

Positive externality in production

Negative externality in consumption

Negative externality in production
Based on the type of externality you are modeling in this exercise, which of the following do you expect to be true?

The socially optimal price will be lower than the market equilibrium price or the socially optimal price will be higher than the market equilibrium price.
2. Find the following values:
a) Equilibrium price:
b) Equilibrium quantity:
c) Total surplus:
d) Total value of the externality at the market equilibrium quantity: $
e) Socially optimum quantity (Q*):
f) Socially optimum price (P*): $
g) Total surplus at socially optimal equilibrium:
h) Deadweight loss:

Answer 1

(Part 1)

(A) Option (d)

Presence of MEC (Marginal external cost) indicates a negative externality in production. This increases private marginal cost to the level of marginal social cost, by the amount equal to MEC.

(B) With negative externality, socially optimal price will be higher than the market equilibrium price (and socially optimal quantity will be lower than market equilibrium quantity).

NOTE: As per Chegg Answering Policy, 1st part with multiple sub-parts has been answered.