A) What kind of externality is this? B) What is the efficient quantity?

10 950 Supply 8.50 МЕВ 8 7.50 Demand 50 60 70 80 90 110 120 100

A) What kind of externality is this?

B) What is the efficient quantity?

C) What is the DWL of this externality?

D) If a pigouvian tax/subsidy is used, what will be selected?

Expert Solution

A) Marginal social benefit is greater than demand or marginal private benefit. It means it's a positive Externality.

B) Efficient quantity occurs at the point where MSB = supply. That is, efficient quantity is 100 units.

C) DWL = (1/2) * (100 - 80)* (9 - 8) = $10

D)As it's a positive Externality, a pigouvian subsidy should be used to move the demand curve towards the MSB curve and therefore internalize the Externality.

Rahul Sunny answered 2 years ago

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