If production causes an external cost and the supply including the externality is given by 1/3P=Q....

If production causes an external cost and the supply including the externality is given by 1/3P=Q. What is the socially efficient level of of production if demand is Q=30−1/2P?

Expert Solution

Demand equation: Q = 30 - (1/2)P

Supply equation: (1/3)P = Q

At socially efficient level, demand = supply

=> (1/3)P = 30 - (1/2)P

=> (1/3)P + (1/2)P = 30

=> (2P + 3P) / 6 = 30

=> 5P / 6 = 30

=> P = (30 *6 / 5)

=> P = 36.

Put P =36 in supply function:

Q = (1/3)P

=> Q = (1/3)*36

=> Q = 12

Socially efficeint level of output is 12 units

Rahul Sunny answered 2 years ago

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