Suppose a good is produced in a perfectly competitive market. In this market the marginal social benefit (MSB

) exceeds the marginal private benefit (MPB) at every quantity. The marginal social cost (MSC) equals the marginal private cost (MPC

) at every quantity.

(A.) correctly labeled graph of the MSB

, MPB, MSC, and MPC

curves and show each of the following.

• (i) The market equilibrium quantity, labeled QM
• (ii) The socially optimal quantity, labeled QS
• (iii) The deadweight loss at the market equilibrium, shaded completely

(b) Suppose the government is considering two proposals to make consumers internalize the consumption externality.

• Proposal I Imposing a binding price ceiling
• Proposal I IGranting a per-unit subsidy to consumers
• (i) Compared to the market equilibrium in part (a), would the deadweight loss increase, decrease, or remain the same under Proposal I? Explain.
• (ii) Compared to the market equilibrium in part (a), would the quantity produced increase, decrease, or remain the same under Proposal II? Explain.