ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Consider a market with free entry and exit where all firms are identical and have the following TVC schedule and a fixed cost of 32.

Q           1             2             3             4             5             6              7             8             9             10

TVC     12           20           24           28           34           42           52           64           78           94

And let demand for this good be given by the following schedule.

P           2             4             6             8             10             12              14             16             18             20

QD       1700      1600     1500      1400       1300        1200          1100        1000       900           800

a. Now assume that the production of this good comes with an external cost of $4.  On a graph show the supply, demand and marginal social cost for this good.  Also indicate the efficient quantity and the dead weight loss.

b. Considering that the equilibrium quantity is no longer efficient, what would be the efficient way to change it: changing the number of firms or having each firm produce a different quantity? 

c. What policy would result in the market producing the efficient quantity?  I have a specific policy in mind here which is mentioned in the book.  Assume that policy makers don't know the efficient quantity and can't just order everyone to do the efficient thing but they DO know the size of the external cost.

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