EAE 313: PUBLIC FINANCE

Q, c) & 2. a) & b)

(c ) The inverse demand facing a farm sector sis denoted by P=20-X where X is output and P is output price. The sector's activities also generate positive eternality and the marginal externality benefits is MEB = 10 - 0.5X. The marginal cost of production is MC = 2 + X. Required (i) How much output will be produced and at what consumer price if the industry operates as a monopoly in the output market? (4 marks) (11) What will be the welfare loss in this case? (8 marks) (iii) What policies can be used to attain the social optimum? (2 marks) a. 2. (a) A monopolist demand function is given by; P=Q' -10Q + 28 and cost function; C=Q2. If the firm is causing a pollution to the society valued at MC = 3, solve for the social optimal level of output and price. What should be the tax level? (10 marks) The ma ( b ) The free-market system may bring about considerable income inequalities which, if widely perceived as 'unfair' outcomes, may require intervention to correct. Give MC= five reasons for this. (10 marks) etermin ilate th Page 1 of 2 INVOLVEMENT IN ANY EXAMINATION IRREGULARITY SHALL LEAD TO DISCONTINUATION act de u that the cost f 0 - 0.5P