Externalities Assume the private demand curve (private marginal utility) for automobile trips is given by P=1020-1.5Q....

Externalities

Assume the private demand curve (private marginal utility) for automobile trips is given by P=1020-1.5Q. The private supply curve (private marginal cost curve) is given by P=200+2Q. P stands for the price of gasoline and Q for vehicles miles driven.

a) Calculate the private equilibrium

b) If the supply of the good is associated with an external cost of 25 per unit (shift supply curve), what is the socially optimal quantity?

c) What is the DWL of the private solution?

d) Assume the city were to impose a Pigou Tax on the supply side. What is the tax ($/unit) at the privately optimal quantity? What is the tax ($/unit) at the socially optimal quantity?

Solutions

Expert Solution

Rahul Sunny answered 2 years ago

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