Part 1: Welfare in a market with an externality Suppose the production of honey costs the producers the following private marginal costs: PMC(Q) = 10 + 4Q where Q is units of honey. The production of honey benefits the nearby producers of almonds because they need bees to pollinate their trees. Each unit of honey produced yields $1 in external benefits to the almond producers outside of the honey market. MBQ) = 6 Suppose the private marginal benefit of consuming honey is: PMB(Q) = 70 - 20 where Q is units of honey. There is no externality from the consumption of honey. Honey is a private good. 1. What are the (i) the competitive quantity Q and (ii) the socially optimal quantity Q*? 2. What is the total private surplus at (1) the competitive quantity Q and (i) the socially optimal quantity Q"? 3. What are total external benefits (eg external surplus) at (i) the competitive quantity Q and (ii) the socially optimal quantity Q*? 4. What is the total surplus at the (i) competitive quantity Q* and (ii) socially optimal quantity Q"? 5. How does the total surplus at the competitive quantity Q compare to the total surplus at the efficient quantity Q*? Provide economic reasoning for why they differ (or don't differ). 6. What is the deadweight loss at (i) competitive quantity Q and (ii) socially optimal quantity Q"? [Exam continues on next page Part 1: Welfare in a market with an externality Suppose the production of honey costs the producers the following private marginal costs: PMC(Q) = 10 + 4Q where Q is units of honey. The production of honey benefits the nearby producers of almonds because they need bees to pollinate their trees. Each unit of honey produced yields $1 in external benefits to the almond producers outside of the honey market. MBQ) = 6 Suppose the private marginal benefit of consuming honey is: PMB(Q) = 70 - 20 where Q is units of honey. There is no externality from the consumption of honey. Honey is a private good. 1. What are the (i) the competitive quantity Q and (ii) the socially optimal quantity Q*? 2. What is the total private surplus at (1) the competitive quantity Q and (i) the socially optimal quantity Q"? 3. What are total external benefits (eg external surplus) at (i) the competitive quantity Q and (ii) the socially optimal quantity Q*? 4. What is the total surplus at the (i) competitive quantity Q* and (ii) socially optimal quantity Q"? 5. How does the total surplus at the competitive quantity Q compare to the total surplus at the efficient quantity Q*? Provide economic reasoning for why they differ (or don't differ). 6. What is the deadweight loss at (i) competitive quantity Q and (ii) socially optimal quantity Q"? [Exam continues on next page