Question

2. Suppose the (inverse) market demand for solar panels is p= 1500 − 20Q and the (inverse) market supply is p= 10Q

a. Find the competitive market equilibrium price and quantity.

b. Each solar panel sold reduces pollution by 1 unit, and each unit reduction in pollution has a benefit of $300 to the rest of society. What is the optimal quantity of solar panels for society?  

c. What is the deadweight loss to society of the competitive equilibrium outcome?   

d. The government wants to eliminate the externality by providing a subsidy to consumers of s dollars per unit of solar panels bought. How much should the per unit subsidy s be to eliminate the externality?   

e. What is the new equilibrium price to consumers? What is the new equilibrium price to producers?   

f. Comparing the equilibrium with the subsidy to the competitive equilibrium in part a), find the gains or losses to …

i. Consumers of solar panels (change in CS)

ii. Producers of solar panels (change in PS)

iii. Government (change in government revenues)

iv. Nation as a whole – consumers, producers, government, and all the other members of society.

Answer 1

Market request = Marginal Benefit (MB) = 1500 - 20Q

Market Supply = Marginal Cost (MC) = 10Q

a. competitive market equilibrium is given by

P=MC

1500-20Q = 10Q

Q= 50

P= 500

The negligible outside advantage = $300

Social negligible advantage = Marginal private advantage + peripheral outer advantage = 1500 - 20Q + 300 = 1800 - 20Q

b. Ideal solar amount for society is given by:

SMB = MC

1800 - 20Q = 10Q

Q= 60

c. Deadweight misfortune (DWL) to the general public of the competitive equilibrium is appeared in above figure. the territory of DWL triangle is as per the following:

DWL = 1/2 ( 300 * 10) = 1500

d. the government ought to give subsidy (s) as appeared in figure. s= $300

e. new equilibrium cost to purchasers and producer is $300.

f. (I). change in consumer surplus(CS) = new CS - unique CS = (1/2 * 1200 * 60) - (1/2 * 1000 * 50) = 11000

(ii). change in producer excess (PS) = new PS - unique PS = (1/2 * 300 * 30) - (1/2 * 500 * 50) = - 8000

(iii). change in government revenue(GR) = - ( endowment * socially ideal amount) = - 18000

(iv). country all in all = CS+PS+GR = 11000 - 8000 - 18000 = - 15000

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