Externalities

Consider the perfectly competitive market for strawberries at the Davis farmers market. The market's inverse demand curve is p = 600 20Q. Firms selling strawberries at the farmers market have marginal cost curve MC^p = 20Q. Also assume that, because there is a fixed amount of space at the farmers market, each strawberry sold at the farmers market has negative social cost (less bread stands!), with a cost of space-taking of MC^(st) = 12Q. However, because having stawberries around the farmers market puts buyers in a good mood, there is also a positive externality that strawberry firms receive equal to MB^(gm) = 2Q (MB is marginal benefit).

A. What are the perfectly competitive equilibrium price and quantity in this market?

B. What is the socially optimal equilibrium price and quantity in this market?

C. Draw this market, including the following curvesdemand, private marginal cost, and social marginal cost. Also label the following pointsthe perfectly competitive equilibrium and the socially optimal equilibrium. Also please label axes and where curves cross axes.

D. What is deadweight loss in this market?

Now suppose the Davis farmers market wants to set a specific tax on this market to ensure the socially optimal level of strawberries.

E. What specific tax should the Davis farmers market set?

Now assume that one farm owned by an ex-chancellor of UCD has bribed the Davis farmers market officials to obtain a monopoly in selling strawberries at the farmers market. Assume the demand and marginal cost curves stay the same.

F. What is the un-regulated monopoly equilibrium in this market in terms of price and quantity?

G. Draw this market, including the following curvesdemand, marginal revenue, private marginal cost, and social marginal cost. Also label the following pointsthe un-regulated monopoly equilibrium and the socially optimal equilibrium. Also label axes and where curves cross axes.

H. What is deadweight loss in this market?

Suppose again that the Davis farmers market wants to set a specific tax on this market to ensure the socially optimal level of strawberries.

I. What specific tax should the Davis farmers market set in the case of the monopoly?