Question

211 albCcDc5e Aalbccbdte Aato OA E E AaBbCcDc AaBb CcDdEt AaBbc Heading 1 Heading 2 E O Normal No Spacing & The following graph represents a market with an externality Assume there is no government Intervention. (6 pts.) Price $210 -- $200 a. Is this an example of a negative or positive b. What quantity will be produced in the market What price will the market selleach unt? d. Calculate the external cost per unit at the quantity that tha market e. What is the efficient quantity to produce? Using the graph above, identify the weath

Answer 1

Question 8

(a)

In this case, marginal social cost is higher than the marginal private cost at each level of output produced.

When marginal social cost is greater than the marginal private cost then production is creating negative externality.

So,

This is an example of a negative externality.

(b)

Market will produce the quantity corresponding to which MPC curve is intersecting the 'D=MSB' curve.

MPC and 'D=MSB' curve are intersecting each other corresponding to output of 600 units.

So,

The quantity to be produced in the market is 600 units.

(c)

The price corresponding to intersection of MPC and 'D=MSB' curve is $197 per unit.

So,

The price at which market will sell each unit is $197.

(d)

At output of 600 units, MPC is $197 and MSC is $210.

Calculate the external cost -

External cost = MSC - MPC = $210 - $197 = $13

Thus,

The external cost per unit at the quantity that is being produced in the market is $13.

(e)

Efficient quantity is that quantity corresponding to which MSC intersects 'D=MSB' curve.

MSC curve and 'D=MSB' curve are intersecting each other corresponding to output of 500 units.

So,

The efficient quantity to produce is 500 units.

(f)

Inefficiency in the market is represented through area of dead weight loss.

Following figure shows the dead weight loss or inefficiency -

$210 ---- Inefficiency or, dead weight loss $200 $197 DMSE