Question
Negative Externalities The market for jelly has a supply and demand given by the following: QD=200-10p QS=20p-100 The production of jelly creates an externality with
Negative Externalities The market for jelly has a supply and demand given by the following: QD=200-10p QS=20p-100 The production of jelly creates an externality with marginal external cost of: MEC = 0.05Q (a) Find the competitive equilibrium price and quantity. (b) Find the CS, PS, and Total External Cost. (c) What is the efficient output (d) What is the deadweight loss?
COULD YOU HELP ME TO EXPLAIN WHY THESE HAVE ANSWERS LIKE THIS.
Setting Qs=Qd P*=10 and Q*=100 (b) CS=500, PS=250, TEC=250 total welfare = 500+250-250=500 Note: the total external cost (TEC) is the area under the MEC curve up to Q=100. (c) First compute the inverse supply (PMC) and demand (PMB=SMB): PMB=SMB=20-0.05Q (inverse demand) PMC=5+0.05Q Add PMC+MEC=SMC: SMC = 5+0.1Q Efficiency is where SMB=SMC Q=75 (d) DWL=62.5
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