Question #2 The marginal social benefit of the Qh unit of a product is given by

Question

Question #2 The marginal social benefit of the Qh unit of a product is given by MSB-100-0 The marginal social cost of the Qth unit is MSC-40 The demand for the product is P=100-Q The supply of the product is P-3Q What is the Pareto efficient quantity of the product? What is the equilibrium quantity of the product? Suppose the government imposes a Pigouvian excise tax on the product of T per unit. What level of the tax causes the market to achieve the Pareto efficient quantity? How much of the tax (on a per-unit basis) will the consumer pay? How much (on a per-unit basis) will the producer pay?

Explanation / Answer

Question 1). Solution :- Calculation of Pareto efficient quantity of product in the given question :-

Equating Marginal social benefit (MSB) and Marginal social cost (MSC) in the given question :-

100 - Q = 4Q

100 = Q + 4Q

100 = 5Q

Q = 100 / 5

Q = 20 units.

Conclusion :- Pareto efficient quantity of product = 20 units.

Question 2). Solution :- Equilibrium quantity is the quantity level at which the demand and supply of product are equal. Accordingly, for calculating the equilibrium quantity of product, equate demand and supply of the product :-

100 - Q = 3Q

100 = Q + 3Q

100 = 4Q

Q = 100 / 4

Q = 25 units.

Conclusion :- Equilibrium quantity of product = 25 units.

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