Consider the following marginal benefit (demand) curves of two individuals for a certain good: MBA(q) =...

Consider the following marginal benefit (demand) curves of two individuals for a certain good: MB_A(q) = 100 – q and MB_B(q) = 300 – q.

Consider the Marginal Private Costs of providing Fireworks in The Park, MC(q) = 50 + q.

Find q^M, the amount of Fireworks in the Park provided by the Market, when individuals provide the good with no co-operation and act only in their self-interest.
What is the efficient level of Fireworks in the Park, q*?
Person B brings a friend to the park (person C), with the same MB curve as theirs (MB_C = 300 – q). Find the new quantity provided by the Market (q^M) and the new efficient level of Fireworks in the Park (q*).
Despite being visually appealing, fireworks are known to cause negative externalities such as noise pollution and increased deaths by heart attacks in dogs. We estimated the marginal external costs of Fireworks in the Park, MEC (q) = 70 + q. What is the new efficient level of Fireworks in the Park? Consider the MSB curve found in part f, which includes person C. How does this new efficient allocation compare to the Market equilibrium, q^M, found in f?

Solutions

Expert Solution

PArt a) when individuals provide the good with no co-operation and act only in their self-interest.Then each individual will consume at the point where its marginal benefit equals marginal private cost

Therefore, if each individual acts in his self interest 150 units of fireworks will be provided by the market

Part b) efficient level would be found at the point where sum of marginal benefit of the 2 individuals equals

Part c) another person C comes in the market whose marginal benefit is same as person B

If all 3 of them acts in self interest, they will consume at point where marginal benefit equals marginal private cost

Therefore, if each individual acts in his self interest 275 units of fireworks will be provided by the

Efficient level at point where sum of marginal benefit of the 3 persons is equal to marginal provate cost

Part c) if there external costs of fireworks then efficient level is at the point where marginal benefit equals marginal social cost

Rahul Sunny answered 2 hours ago

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