Font Paragraph Sample Externality Problem Suppose the demand for steel in our town is Qd=96-4P. This means MB=24 (1/40. The first unit of steel produces a benefit to our economy of (24+24.75) (1/2)-$24.5 and each additional unit of steel benefits our economy by $0.25 less. Suppose Os=-30+5P, this means the MPC (marginal private cost)=6+(1/5). The first unit of steel produced costs the producers of steel (6+6.2)*(1/2)=$6.1 and each additional unit of steel costs private producers $0.2 more. If we want to maximize private gains, set MB=MPC (which is the same as setting Qd=Os) Equilibrium occurs at Q-40 and P=MB=MPC=$14. Total benefits (area under D) = (24+14)*40/2=$760. Total private costs (area under S) = (6+14)*(40/2) =$400, Total private galns=Total benefits minus total private costs = $760-$400=$360 But the steel factory causes damage to children's lungs and dirty laundry etc... Let the Total Damage to our town be (1/40)Q++20 (for every Q=a unit of steel produced). MD (marginal damage) =2+Q/20. The marginal cost to our society (marginal social cost) of the steel production (MSC) = MPC+MD = 6+(1/5)Q+2+(1/20)Q = 8+1/4) When Q-40, total damage (2+4)*40/2 or (1/40)40 +2(40)=120 At Q=40, total social gains=total private gains minus total damage=$360-$120=$240 If we want to maximize total social gains, set MB=MSC. Optimal production occurs at Q=32, MPC=12.4, MD=3.6, MSC-MB=$16 At Q=32, total benefits= (24+16)*32/2=$640, total private costs = (6+12.4)*32/2=$294.4, Total damage = 2+3.6)*32/2=89.6, Total social cost=8+16)*32/2=384 or 294.4+89.6. Total social gains = $640-384=$256 >$240 at Q-40 If we let the steel producers maximize their personal gain, the "waste" to society will be $256-$240=$16 (18-14) 40- 32)/2=$16 Quantity Produced Net Private Benefit Total Damage Net Social Gain 0 0 0 32 (Optimal) 345.6 89.6 256 40 Maximum TPB) 360 120 240 0 Three ways to fix thirrohlomi Font Paragraph Sample Externality Problem Suppose the demand for steel in our town is Qd=96-4P. This means MB=24 (1/40. The first unit of steel produces a benefit to our economy of (24+24.75) (1/2)-$24.5 and each additional unit of steel benefits our economy by $0.25 less. Suppose Os=-30+5P, this means the MPC (marginal private cost)=6+(1/5). The first unit of steel produced costs the producers of steel (6+6.2)*(1/2)=$6.1 and each additional unit of steel costs private producers $0.2 more. If we want to maximize private gains, set MB=MPC (which is the same as setting Qd=Os) Equilibrium occurs at Q-40 and P=MB=MPC=$14. Total benefits (area under D) = (24+14)*40/2=$760. Total private costs (area under S) = (6+14)*(40/2) =$400, Total private galns=Total benefits minus total private costs = $760-$400=$360 But the steel factory causes damage to children's lungs and dirty laundry etc... Let the Total Damage to our town be (1/40)Q++20 (for every Q=a unit of steel produced). MD (marginal damage) =2+Q/20. The marginal cost to our society (marginal social cost) of the steel production (MSC) = MPC+MD = 6+(1/5)Q+2+(1/20)Q = 8+1/4) When Q-40, total damage (2+4)*40/2 or (1/40)40 +2(40)=120 At Q=40, total social gains=total private gains minus total damage=$360-$120=$240 If we want to maximize total social gains, set MB=MSC. Optimal production occurs at Q=32, MPC=12.4, MD=3.6, MSC-MB=$16 At Q=32, total benefits= (24+16)*32/2=$640, total private costs = (6+12.4)*32/2=$294.4, Total damage = 2+3.6)*32/2=89.6, Total social cost=8+16)*32/2=384 or 294.4+89.6. Total social gains = $640-384=$256 >$240 at Q-40 If we let the steel producers maximize their personal gain, the "waste" to society will be $256-$240=$16 (18-14) 40- 32)/2=$16 Quantity Produced Net Private Benefit Total Damage Net Social Gain 0 0 0 32 (Optimal) 345.6 89.6 256 40 Maximum TPB) 360 120 240 0 Three ways to fix thirrohlomi