Consider a market with free entry and exit where all firms are identical and have the following TVC schedule and a fixed cost of 32. Q 1 2 3 4 5 6 7 8 9 10 TVC 12 20 24 28 34 42 52 64 78 94 And let demand for this good be given by the following schedule. P 2 4 6 8 10 12 14 16 18 20 QD 1700 1600 1500 1400 1300 1200 1100 1000 900 800 a. Now assume that the production of this good comes with an external cost of $4. On a graph show the supply, demand and marginal social cost for this good. Also indicate the efficient quantity and the dead weight loss. b. Considering that the equilibrium quantity is no longer efficient, what would be the efficient way to change it: changing the number of firms or having each firm produce a different quantity? c. What policy would result in the market producing the efficient quantity? I have a specific policy in mind here which is mentioned in the book. Assume that policy makers don't know the efficient quantity and can't just order everyone to do the efficient thing but they DO know the size of the external cost.
Consider a market with free entry and exit where all firms are identical and have the following TVC schedule and a fixed cost of 32.
Q 1 2 3 4 5 6 7 8 9 10
TVC 12 20 24 28 34 42 52 64 78 94
And let demand for this good be given by the following schedule.
P 2 4 6 8 10 12 14 16 18 20
QD 1700 1600 1500 1400 1300 1200 1100 1000 900 800
a. Now assume that the production of this good comes with an external cost of $4. On a graph show the supply, demand and marginal
b. Considering that the equilibrium quantity is no longer efficient, what would be the efficient way to change it: changing the number of firms or having each firm produce a different quantity?
c. What policy would result in the market producing the efficient quantity? I have a specific policy in mind here which is mentioned in the book. Assume that policy makers don't know the efficient quantity and can't just order everyone to do the efficient thing but they DO know the size of the external cost.
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