Question

A long time ago in a galaxy far, far away…

After the fall of the Empire, the turmoil leads many former Imperial Stormtroopers to turn to deathsticks for relief. Deathsticks are a highly addictive drug that causes users to hallucinate. Given this information, in the deathstick market there is likely a (negative/positive/no) externality in (consumption/production/either side of the market). This means the marginal social (benefit/cost) is greater than the marginal private (benefit/cost) in this particular market, and the equilibrium quantity is (the same/greater than/less than) the efficient quantity.

Having conquered the spice mines of Kessel, Jabba’s successor Ziro the Hutt has taken control of the galaxy’s deathstick market. In other words, Ziro is the only producer of deathsticks in the galaxy. As Ziro notices that as he produces deathsticks, the marginal cost of deathstick production increases. Graph Ziro’s cost curves (ATC, AVC, MC), the price and/or marginal revenue curve(s), and indicate the point where Ziro will produce. Be sure to show any deadweight loss or profit if any exists.

Answer 1

After the fall of the Empire, the turmoil leads many former Imperial Stormtroopers to turn to deathsticks for relief. Deathsticks are a highly addictive drug that causes users to hallucinate. Given this information, in the deathstick market there is likely a negative externality in consumption. This means the marginal social cost is greater than the marginal private benefit in this particular market, and the equilibrium quantity is greater than the efficient quantity.

Parrt 2:

Ziro's cost curves:

Ziro is right to realsize his MC curve is rising. Ziro will produce at Q (indiccated on x-axis). This is where his MC curve meets his MR curve. Q will meet demand curve (D) vertically to decide price, P, on y-axis. So, Ziro will produce Q units and sell at price P.

Ziro's profits and deadweight loss (DWL) are as follows:

The oange rectangle is Ziro's  profit. Purple triangle is the deadweight loss.