Class Participation Suppose you are given the following information about the ma
ID: 1138251 • Letter: C
Question
Class Participation Suppose you are given the following information about the market for some good. The supply, or MPC, curve identifies the firm's marginal cost of production. The demand, or MB, curve identifies how much consumers are willing to pay for the good. The marginal external cost measures the damage imposed on third parties by the production of this good. The damage may take the form of air or water pollution. Supply Demand Marginal external cost MEC-0.05Q Find the private equilibrium price and quantity: P- 22 Q- 16 0 . Find the social equilibrium price and quantity: P26 0-128 Show your work below. Graphically illustrate on the backside. Seeo P- 10+0.075Q- MPC P-42-0.125Q MB Print 0.20- 32 The marginal net benefit (to the producers and consumers) of producing and selling one more unit of output is the difference between the price the consumer is willing to pay (WTP-MB) and the price the firm is willing to sell for (WTS-MPC). The MEC measures the damage imposed on the third party by the production of one more unit of the good. Fill in the values in the following table. WTP WTS WTP-WS MEC 121 128 150 160 Why is the social equilibrium preferred to the private equilibrium? You may answer on the backside.Explanation / Answer
Q WTP WTS WTP-WTS MEC 121 26.875 19.075 7.8 6.05 128 26 19.6 6.4 6.4 150 23.25 21.25 2 7.5 160 22 22 0 8 Social equilibrium is preferred because it takes into account the external cost and it leads to reduced level of externality created by the firm.