1. Suppose a logging company cuts trees from a local wood, but that nearby homeowners use the woods forhunting deer, and that the cutting of trees decreases the amount of deer the homeowners can catch. Demand forthe timber is given by P= 100 – X, and the logging company's (one of many, so market outcome is P = MPC),marginal costs of cutting down the trees is MPC - 4X. Suppose that once we include the damage done to thehomeowners, the marginal social costs are determined to be MSC = X + 10.a. Suppose the logging firm owns the woods and logs all they want. How much do they produce?b. What would be the total value of the damage done to the homeowners in this case?What is the efficient level of production?с.d. What is the maximum amount (total) the homeowners would be willing to pay the logging firm to decreaseproduction to the efficient level.What is the minimum amount (total) the firm would be willing to accept to decrease production to theefficient level?c.f. What will be the marginal payment of the homeowners to reach efficiency?g. What are the net gains to society of reaching the efficient outcome vs the outcome in part 'a'?

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Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter18: Asymmetric Information

Section: Chapter Questions

Problem 18.7P

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1. There are two brands of cigarettes X, Y. The demand for each is as follows: Qx = 80 - 2p Qy = 60 - 0.5p Assume that the marginal cost of producing cigarette X is $10, the marginal cost of producing cigarette Y is $8, and that the market for both cigarettes is perfectly competitive. Assume that each pack of cigarette X smoked does $5 worth of health damage to the smoker, and a total of $4 worth of health damage to the smoker’s neighbors via second-hand smoke. Each pack of cigarette Y smoked does $6 worth of health damage to the smoker, and $5 health damage to the smoker’s neighbors. (a) Explain why the public supply curves differ from the private supply curves, and how this represents the externality from second-hand smoke. Highlight the area(s) of your diagram that represents a social loss. (b) Calculate the social loss for both. (c) Suppose the government decides to pursue a Pigouvian solution to eliminate social loss. What's amount of tax or subsidy would the government…
1. There are two brands of cigarettes X, Y. The demand for each is as follows: Qx = 80 - 2p Qy = 60 - 0.5p Assume that the marginal cost of producing cigarette X is $10, the marginal cost of producing cigarette Y is $8, and that the market for both cigarettes is perfectly competitive. Assume that each pack of cigarette X smoked does $5 worth of health damage to the smoker, and a total of $4 worth of health damage to the smoker’s neighbors via second-hand smoke. Each pack of cigarette Y smoked does $6 worth of health damage to the smoker, and $5 health damage to the smoker’s neighbors. (a) Plot the private demand curve and private supply curve for both cigarettes on separate axes. (b) What is the privately efficient quantity demand of both cigarettes? (c) Add the public supply curves to the graphs you plot in (a). (d) What is the socially efficient quantity demand of both cigarettes?
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