Suppose that demand for a product is Q=140-6P and supply is Q=2P-20. Furthermore, suppose that the marginal external damage of consuming this product is $4 per unit. Does it result in underconsumption? Or overconsumption? How many more or less units of this product will the free market produce than is socially optimal? Calculate the deadweight loss associated with the externality.

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Collen VonLv2

12 Jul 2018

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Suppose that demand for a product is Q=140-6P and supply is Q=2P-20. Furthermore, suppose that the marginal external damage of consuming this product is $4 per unit.

Does it result in under-consumption? Or over-consumption? How many more or less units of this product will the free market produce than is socially optimal? Calculate the deadweight loss associated with the externality.

blackporcupine572

You have been hired by the town of Bedford, Ohio, to conduct an analysis of ongoing operations by a local Coca Cola bottler. A study by the Ohio Environmental Protection Agency found that this firms water pollution is negatively affecting the environment. The study has been read by several politicians and they have requested the state government to impose a tax. Politicians expect to observe a decrease in environmental damage (specifically, eliminate the deadweight loss).

Your task is to find the optimal tax that the government should impose to this Coca Cola bottler. To help you in your task, you are given the following information:

Inverse Demand: P=10- Q

Inverse Supply (Marginal Private Cost): MCp = 5+Q

Externality Cost (Marginal Cost of Externality): MCE = 0.5Q

a. Find the equilibrium market price and quantity (P_m, Q_m)

b. Find the socially optimal equilibrium price and quantity ( P*, Q *)

c. Determine the optimal tax (the Green Tax) the state government should charge the local Coca Cola bottler to deal with the negative externality. Hint: To find this, measure the difference between the socially optimal equilibrium price (P*) and the price the firm receives at the socially optimal equilibrium quantity (Q*), that is, MCp (Q=Q*)

viridiancod415

Suppose that the Private Cost of producing a good is given by the equation Q = 3P - 5, but the Social Cost of producing the good is given by Q = 3P - 11. Meanwhile, the demand for this good is given by Q = 111 - 2P. In order to correct for the externality, the government has imposed a tax of $12.89 per unit on producers, but the government did so without bothering to check whether or not the tax was equal to the size of the externality. Given all of this information, what is the area of deadweight loss in this market after the tax has been imposed?