1 Negative Externality Suppose that the private market for widgets is characterized by the following supply and inverse demand functions: D: P = 10-Q S: P = Q 1. Graph these functions in P/Q space. Locate the private market equilibrium price and quantity. 2. Now suppose that the EPA calculates that the marginal external cost of widget production is cha- racterized by: MD = $2. Graph the market with the externality and locate the the socially efficient equilibrium. How much dead weight loss was produced by the private market. = 3. Now suppose that the EPA revises their MEC estimate to: MD Q. Graph the market with the externality and locate the socially efficient equilibrium. Compare this with the outcome from part 2.

1 Negative Externality Suppose that the private market for widgets is characterized by the following supply and inverse demand functions: D: P = 10-Q S: P = Q 1. Graph these functions in P/Q space. Locate the private market equilibrium price and quantity. 2. Now suppose that the EPA calculates that the marginal external cost of widget production is cha- racterized by: MD = $2. Graph the market with the externality and locate the the socially efficient equilibrium. How much dead weight loss was produced by the private market. = 3. Now suppose that the EPA revises their MEC estimate to: MD Q. Graph the market with the externality and locate the socially efficient equilibrium. Compare this with the outcome from part 2.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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