4) Assume that the market for energy-efficient window installations in San Diego is perfectly competitive. Quarterly inverse supply and inverse demand are P = 1200 - 3QD (Private MB) P = 440 + QS (Private MC) These windows reduce air conditioning costs, which generates extra benefits for your neighbors (lowering the overall price of electricity, reducing pollution, and so on). These external benefits to consumers are estimated to be EMB = 2Q (the more windows installed, the more external benefit to installing more windows).

a) Find the equilibrium price and quantity that will be produced in a competitive market. Find the socially optimal price and quantity. Calculate a Social MB curve that includes the private benefits (i.e. the demand curve) as well as the external marginal benefits. A chooses B chooses L M H L M H L M H L M H A=M, B=H (50,75)

b) Draw a graph that includes the supply curve, the demand curve, and the social marginal benefit curve. Label the market equilibrium, as well as the social optimum. Using letters to label the various areas of this graph, and write expressions for the consumer surplus, producer surplus, and external benefits based on the market outcome. For example, CS = A+B+C. Based on your labels, which area represents the external benefit generated at the market outcome?

c) Comparing the market outcome and the socially optimal outcome, which areas describe deadweight loss? Calculate a dollar value for this deadweight loss. Explain why there is deadweight loss in this market.

d) Briefly discuss a government intervention that could improve social welfare in this market. What's the rationale behind your policy?