Externalities There is a good that is consumed, but unfortunately, its production creates additional "external" costs. We know the following marginal values - MB (for marginal benefit), MPC (for marginal private cost), MEC (for marginal external cost), and associated Total Value Functions.

MPC = 2.0Q Total Private cost = 1Q2 MEC = 3 Total Extermal cost = 3Q MB = 40.0 - 2.0Q Total Benefits = 40Q - 1Q2

(a) Plot MPC, MEC, MB, and MSC (Marginal Social Cost) on the graph below. Note that you need to find MSC in order to plot it. (it is ok to draw the graph free hand and to not plot it if printing is not feasible for you).

(b) What is the market equilibrium price and quantity for the good? What is the socially optimal price and quantity of the good?

(c) Compute and compare the total net benefits under the socially optimal quantity of good and the competitive market equilibrium. Do this using the areas under the relevant marginal curves, but validate them using the relevant total value of functions.

(d) Suggest a per unit tax on the production of the good that would lead to the efficient level of output.

70 65 Externality Example 60 55 50 45 40 35 30 25 20 15 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25