Microeconomics (2nd Edition) (Pearson Series in Economics)
2nd Edition
ISBN: 9780134492049
Author: Daron Acemoglu, David Laibson, John List
Publisher: PEARSON
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Question
Chapter 9, Problem 12P
To determine
The maximum possible social surplus.
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Suppose demand is QD =12 - P supply is QS = 2P. There is a constant positive externality of $6 per unit (Marginal External Benefit, MEB = $6).
What subsidy would achieve the efficient allocation? In other words, what subsidy would maximize social surplus? (Do not overthink this one.)
Find quantity given this subsidy.
What is the social benefit that accrues due to the quantity in the previous part? (Hint: It is MEB times the quantity.)
Find (private) producer surplus given this subsidy.
Find (private) consumer surplus given this subsidy.
How much would this subsidy cost the government? In other words, find government “revenue” (which will end up being a negative number).
Add up the answers to the previous four questions to find social surplus. (It should be the same as the area between MSB and MSC.)
Let Q be quantity of beer (in packs) consumed in the US. Assume beer consumption imposes a negative externality of $30 per pack. The private demand for beer is P=150-2Q
while the private supply curve is P-Q. If the government impose a $30 tax per pack of beer, what is the change in total surplus from before to after the imposition of the tax.
$150
$1,350
$150
$1,350
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Consider the production and sale of Good B.
Suppose that the “Social Value” of each unit of Good B is greater than the “Willingness to Pay” of the individual who consumes that unit. There are NO externalities associated with the production or consumption of Good B, and Good B is sold in a competitive market.
Suppose that the “Efficient” level of output for Good B is 400,000 units.
Is the market equilibrium level of output greater than 400,000, less than 400,000, or equal to 400,000 ( just circle your answer; you don’t have to explain)?
Chapter 9 Solutions
Microeconomics (2nd Edition) (Pearson Series in Economics)
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- Which of the following is true if good x is an externality exhibiting good. If consumption of good x by person 1 exhibits a positive externality, then consumption of good x by person 2 must also exhibit a positive externality. Consumers consume too much good y relative to what is socially optimal. Consumers consume too much good x relative to what is socially optimal. Equilibrium consumption of the good is not Pareto efficient.arrow_forwardDistinguish the true statements from the false statements. True False Market failure occurs when negative externalities are present but not when positive externalities are present. The government sometimes intervenes when a market failure occurs. Externalities are the only example of market failure. Market failure occurs when either negative or positive externalities are present. Market failure is when a market provision of a good result in an inefficient quanitity.arrow_forwardHe bought a cell for $579. He doesn't like it anymore and posts it on instagram. He is willing to sell it if he gets a minimum of $194 for it. Someone is interested in the cell and is willing to pay a maximum of $504 for the cell. They negotiate and he sells her the cell at a price of $124. What is the total surplus created by him selling the cell to her? Assume no externalities. Include a negative sign if needed.arrow_forward
- Let the demand curve for gasoline be P= 5-.1Q and the supply curve is P=1Q. Assume gasoline production imposes a $1 negative externality. What is the cost of externality? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. $62.50 $25 $37.50arrow_forwardConsider placing a tax on a good that has a positive benefit externality of MEB=3 where MSC=2Q and MPB = 21-Q. a. Compare the equilibrium outputs with (i) no tax, (ii) with a Tax of $3, and (iii) at the social optimu. b. In this case, what happens to DWL when a tax is added? Show and explain your reasoning.arrow_forwardDoes an externality cause total surplus to increase or decrease?arrow_forward
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