Chapter 14R, Problem 2FRQ

a)

To determine

The market price by labeling it P1 on the graph.

Explanation of Solution

As supply is perfectly inelastic in the market, then the market price will be shown on the graph as follows:

  

Economics Concept Introduction

Introduction: The benefits which are obtained by the third party who is not actually buying, selling, or consuming the good are called external benefits such as using a vehicle to travel that reduces the congestion on the road because it provides benefit to other drivers so that they can drive quickly and safely.

b)

To determine

MSB, the Socially optimal level of quantity, deadweight loss, and kind of externality on graph

Explanation of Solution

1. Marginal social benefit is labeled as MSB on the graph and
2. Socially optimal level of quantity is labeled as Qs where marginal social cost and marginal social benefit are equal.
3. There is a negative externality because hearing music from the concert will not give joy to every person living close to the concert place because they can hate loud music or even it can disturb certain people such as students who study. Therefore, it is a negative externality.
4. Yes, there would be a deadweight loss because, in a negative externality, the excessed quantity of output will generate a deadweight loss as the marginal social cost is greater than the marginal social benefit. The shaded area in the graph is a deadweight loss.

Therefore, the graph will be represented as:

  

Economics Concept Introduction

Introduction: Marginal private benefit is the benefit that is obtained by an individual by using an extra unit of the product. And, the marginal social benefit is the benefit that is obtained by the whole society as well as the individual by producing an extra unit of a product.

Marginal private cost is the cost that is incurred by an individual by using an extra unit of the product. And, the marginal social cost is the expense which is incurred by the whole society due to the production of an extra unit of a product.