8. (11 point.) A factory produces gadgets and generates pollution that causes $50 worth of damage per unit produced. The marginal private cost (MPC) of producing a gadget is given by the equation MPC = 20 + 0.5Q, where Q is the quantity of gadgets produced. The demand for gadgets is given by P = 100-Q, where P is the per-unit price of gadgets. Calculate the socially optimal quantity of gadgets produced.
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- Q4. (a) If you are a firm owner who is operating in the perfect competitive market, you areproducing socially efficient outcome. Does it imply that your profits are zero? If you become amonopolist then why do you deviate from the socially efficient outcome? b) In Delhi, as the winter season is approaching, how will it affect the demand function and themarket equilibrium of sweater market? Now after that if the price of wool increases how will themarket equilibrium be affected?2. Efficiency in the presence of externalities Trucks impose many external costs on society: heavy air and noise pollution, traffic safety issues and road congestion, and so on. Therefore, the market equilibrium quantity of diesel trucks does not equal the socially optimal quantity. The following graph plots the demand for diesel trucks (their private value), the supply of diesel trucks (the private cost of producing them), and the social cost of diesel trucks, including both the private cost and external costs. Use the black point (plus symbol) to indicate the market equilibrium quantity. Next, use the purple point (diamond symbol) to indicate the socially optimal quantity. PRICE OF DIESEL TRUCKS Social Cost Supply (Private Cost) Demand (Private Value) QUANTITY OF DIESEL TRUCKS + Market Equilibrium ■ Socially Optimal Level ?1. Solve for the graph and aggregate demand of the city’s 30 residents as functions of the number of trees. Label intercepts slopes and intersection of two sections. 2. Assume that the city can obtain each tree at a constant marginal cost of 200. Solve the socially efficient numbers of trees for the city to purchase.
- 2. Efficiency in the presence of externalities Fireworks impose many external costs on society: noise pollution, pets and children that become frightened, accidents leading to property damage and bodily harm, and so on. Therefore, the market equilibrium quantity of fireworks does not equal the socially optimal quantity. The following graph plots the demand for fireworks (their private value), the supply of fireworks (the private cost of producing them), and the social cost of fireworks, including both the private cost and external costs. Use the black point (plus symbol) to indicate the market equilibrium quantity. Next, use the purple point (diamond symbol) to indicate the socially optimal quantity. PRICE OF FIREWORKS Social Cost Supply (Private Cost) Demand (Private Value) QUANTITY OF FIREWORKS + Market Equilibrium Socially Optimal Level3°F 2. Efficiency in the presence of externalities Air horns impose many external costs on society: the risk of being deafened, the annoyance of being awakened in the middle of the night, and so on. Therefore, the market equilibrium quantity of air horns is not equal to the socially optimal quantity. The following graph shows the demand for air horns (their private value), the supply of air horns (the private cost of producing them), and the social cost of air horns, including both the private cost and external costs. Use the black point (plus symbol) to indicate the market equilibrium quantity. Next, use the purple point (diamond symbol) to indicate the socially optimal quantity. Social Cost Market Equilibrium Socially Optimal Level oudy PRICE OF AIR HORNS Supply (Private Cost) D3. The total (abatement) cost for cutting down on CO2 by R is C(R) = 7R²+10R. The total benefit of CO2 abatement to the society is B = 100R.. Compute the socially optimal level of abatement (pollution control).
- 2. Efficiency in the presence of externalities Public wifi hotspots grant many external benefits on society: more equitable access to the Internet, increased educational opportunities, and so on. Therefore, the market equilibrium quantity of public wifi hotspots does not equal the socially optimal quantity. The following graph plots the demand for public win hotspots (their private value), the supply of public with hotspots (the private cost of producing them), and the social value of public wif hotspots, including both the private value and external benefits. Use the black point (plus symbol) to indicate the market equilibrium quantity. Next, use the purple point (diamond symbol) to indicate the socially optimal quantity. PRICE OF PUBLIC WIFI HOTSPOTS Supply (Private Cost) Social Value Demand (Private Value) QUANTITY OF PUBLIC WIFI HOTSPOTS + Market Equilibrum . Socially Optimal Level3. The effect of negative externalities on the optimal quantityof consumption Consider the market for electric cars. Suppose that a electric car manufacturing facility dumps sludge into a nearby river, creating a negative externality for those living downstream from the facility. Producing additional electric cars imposes a constant per-unit external cost of $210. The following graph shows the demand (private value) curve and the supply (private cost) curve for electric cars. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $210 per unit. PRICE (Dollars per unit of electric cars) 1400 1260 1120 980 840 700 560 420 280 140 0 0 O U 1 U O O 2 3 4 5 QUANTITY (Units of electric cars) The market equilibrium quantity is 6 Supply (Private Cost) Demand (Private Value) 7 Social Cost ? units of electric cars, but the socially optimal quantity of electric car production is To create an incentive for the firm to produce the socially optimal quantity of…3. The effect of negative externalities on the optimal quantityof consumption Consider the market for electric cars. Suppose that a electric car manufacturing facility dumps sludge into a nearby river, creating a negative externality for those living downstream from the facility. Producing additional electric cars imposes a constant per-unit external cost of $160. The following graph shows the demand (private value) curve and the supply (private cost) curve for electric cars. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $160 per unit. ? PRICE (Dollars per unit of electric cars) 800 720 640 560 480 400 320 240 160 80 0 0 O ☐ 1 ☐ O ☐ O ☐ ☐ O 2 3 5 QUANTITY (Units of electric cars) ☐ Supply (Private Cost) O Demand (Private Value) 6 7 Social Cost 1.5 To create an incentive for the firm to produce the socially optimal quantity of electric cars, the government could impose a per unit of electric cars. 2 2.5 3 3.5 4 4.5 5 5.5 The market…
- 5) Mr. Leon is at it again! He vandalized a public park. Now society has to clean it up. Based on the numbers below what would be the socially optimal amount that should be cleaned up? % cleaned total benefits total costs 25 $10,000 $1,000 50 $15,000 $4,000 75 $18,000 $7,000 100 $19,000 $10,000 *Show the marginal benefits and marginal costs, graphically.3. The effect of negative externalities on the optimal quantity of consumption Consider the market for electric cars. Suppose that a electric car manufacturing facility dumps sludge into a nearby river, creating a negative externality for those living downstream from the facility. Producing additional electric cars imposes a constant per-unit external cost of $210. The following graph shows the demand (private value) curve and the supply (private cost) curve for electric cars. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $210 per unit3. Suppose the EPA wants to reduce pollution to the socially optimal level. Based on the data in the table below, what is the optimal level of pollution? Total cleanup Total Total (tons) Benefit Cost 50 2 85 18 3 115 28 4 140 39 5 160 51 179 63 7 197 76 8 214 90 230 105 10 245 120 11 259 137 12 273 156 13 286 177 14 299 200 15 311 225