Question #1

Assume that the marginal costs (MC) of producing an agricultural commodity is given by MC = 40+1*Q. The demand for this good is given by P = 120 2 * Q. However, production results in ground water pollution due to use of pesticides and creates total externality costs (TEC) of TEC=20 + 0.5 * Q^2 (and marginal external costs of MEC=1*Q) not taken into account by producers.

Calculate the competitive equilibrium output (Qc) and price (Pc), the socially optimal level of output (Q*) and price (P*), and deadweight loss (DWL)

Qc =

Pc =

Q* =

P* =

DWL =

Assume that it is not feasible to tax pesticide residues directly due to non-source pollution and the government instead decides to tax output in order to achieve the social optimum. Determine the optimal per unit tax. What is the amount of tax revenue collected by the government?

Optimal tax =

Tax revenue =

Question #2

Assume that the marginal cost (MC) of producing a good is given by MC = 20 + 3 * Q. The marginal benefits (MB) are given by MB = 120 2 * Q, and the marginal externality benefits (MEB) are given by MEB= 1 * Q.

Calculate the competitive equilibrium output (Qc) and price (Pc), the socially optimal level of output (Q*)

Qc =

Pc =

Q* =

Determine the consumer surplus (CS) and the producer surplus (PS) under the competitive case. Determine the deadweight loss (DWL)

CS =

PS =

DWL =

Assume that the government wants to subsidize production in order to fix the externality problem. Determine the optimal unit subsidy.

Optimal unit subsidy =

Question #3

Assume that you have the following information about the individual demands for a public good:

High income: Ph = 40 1 * Q

Low income: PL = 20 1 * Q

Assume further that there is a total of 3 people in the high income group and a total of 2 individuals in the low income group. Finally, assume that the marginal cost of producing the good is given by: MC = 5 * Q.

What would be the demand function for the public good (in the form P = a - b * Q)?

P = __ - ___ *Q, if Q ___

What is the efficient output level, Q*, of this public good? Q* = ___