Question 3 (Market Failure - Externalities) Consider the inverse demand function p = 400 – 2q in a market for some good. Market supply is given by p = 2q. There is a consumption externality in the market, and the marginal social benefit of consumption is given by MSB = 300 – 3q. a. Suppose the market is unregulated. Find Consumers' and Producers' surplus. Calculate the deadweight loss of the externality and illustrate this loss with a graph. b. Can the government correct this type of market failure with a tax, or a subsidy? If yes, calculate the optimal tax, or subsidy, to correct market failure in the above example. If a subsidy is needed, calculate the total costs of the subsidy. If a tax is needed, calculate the total revenue from the tax. c. Calculate producers' and consumers' surplus under the market-correcting policy you proposed in part b.
Question 3 (Market Failure - Externalities) Consider the inverse demand function p = 400 – 2q in a market for some good. Market supply is given by p = 2q. There is a consumption externality in the market, and the marginal social benefit of consumption is given by MSB = 300 – 3q. a. Suppose the market is unregulated. Find Consumers' and Producers' surplus. Calculate the deadweight loss of the externality and illustrate this loss with a graph. b. Can the government correct this type of market failure with a tax, or a subsidy? If yes, calculate the optimal tax, or subsidy, to correct market failure in the above example. If a subsidy is needed, calculate the total costs of the subsidy. If a tax is needed, calculate the total revenue from the tax. c. Calculate producers' and consumers' surplus under the market-correcting policy you proposed in part b.
Chapter1: Making Economics Decisions
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Transcribed Image Text:Question 3 (Market Failure - Externalities)
Consider the inverse demand function p = 400 – 2q in a market for some good. Market supply
is given by p = 2q. There is a consumption externality in the market, and the marginal social
benefit of consumption is given by MSB = 300 – 3q.
a. Suppose the market is unregulated. Find Consumers' and Producers' surplus.
Calculate the deadweight loss of the externality and illustrate this loss with a
graph.
b. Can the government correct this type of market failure with a tax, or a subsidy? If yes,
calculate the optimal tax, or subsidy, to correct market failure in the above example.
If a subsidy is needed, calculate the total costs of the subsidy. If a tax is needed,
calculate the total revenue from the tax.
c. Calculate producers' and consumers' surplus under the market-correcting policy you
proposed in part b.
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