The market demand for gadgets is given by Qd=100-3p, where Qd is the quantity of gadgets demanded and p is the price of a gadget in dollars. The market supply is given byQs= p, where Qs is the quantity of gadgets supplied. The production of gadgets releases a toxic effluent into the water supply. The marginal external cost can be described by MEC(Q)= 2Q.
a) Compute consumer surplus, producer surplus, and the cost of pollution at the market equilibrium.
b) Compute consumer surplus, producer surplus, and the cost of pollution at the social optimum.
c) Suppose the government is considering imposing a tax of $T per unit on the producers. Find the level of the tax that ensures the socially optimal amount of gadgets will be produced in a competitive equilibrium.
The market demand for gadgets is given by Qd=100-3p, where Qd is the quantity of gadgets demanded and p is the price of a gadget in dollars. The market supply is given byQs= p, where Qs is the quantity of gadgets supplied. The production of gadgets releases a toxic effluent into the water supply. The marginal external cost can be described by MEC(Q)= 2Q.
a) Compute consumer surplus, producer surplus, and the cost of pollution at the market equilibrium.
b) Compute consumer surplus, producer surplus, and the cost of pollution at the social optimum.
c) Suppose the government is considering imposing a tax of $T per unit on the producers. Find the level of the tax that ensures the socially optimal amount of gadgets will be produced in a competitive equilibrium.
