1.

The demand (private benefit) for cars in a town is:

=

100

,

000

10

and the supply (private cost) of cars is:

=

20

,

000

+

10

Each car

produce

s

an externality of $2

0

0

.

a.

Calculate the private market equilibrium price and quantity. What is the size of the

consumer surplus? What is the size of the producer surplus?

b.

Draw a picture of this market, including private benefit, private cost, social cost, and both

the ma

rket equilibrium and the socially efficient equilibrium.

c.

Calculate the socially efficient price and quantity. What is the size of the deadweight loss

at the private market equilibrium