Question

The private marginal cost of throwing a party in the San Francisco is $500.

The demand for parties in SF is characterized by P = 2500 – 50*Q, where Q is the number of parties held per semester.

Each party produces 150 decibels of noise, and each decibel generates $10 worth of pain and suffering among village residents.

A) What is the efficient number of parties provided?

B) The village taxes party hosts $10 for each decibel generated. Hosts respond by adding soundproofing equipment to their facilities so that each party produces only 50 decibels of noise. What is the new equilibrium number of parties provided?

C) The equilibrium quantity found in Part B is  (Click to select)  impossible to calculate inefficiently, high inefficiently, low  efficient  .

D) A pigouvian tax on parties would have led to an equilibrium quantity  (Click to select)  greater than, the same as, that is impossible to compare to, smaller than, the quantity resulting from the tax described in Part B

Answer 1

A) External cost per party=15*10=1500

So social marginal cost=500+1500=2000

Social efficient quantity,

2500-50p=2000

Q=500/50=10

B)New external cost =50*10=500

New private marginal cost=500+500=1000

Market equilibrium,

2500-50q=1000

Q=1500/50=30

C)Low efficient

D)Same as equilibrium quantity in part B)