8. Consider the situation where there is a negative externality associated with the production of a good whose consumption generates marginal benefits: MB-100-2Q. The marginal private cost of producing this good is MCp=10+Q. Marginal external costs are constant; in particular each unit produced causes an additional $30 in external costs. (A) Identify the market outcome (Po. Qo), assuming the externality is ignored. (B) What are the marginal costs as seen by society? (C) Identify the outcome (P. Q1) that maximizes social welfare (i.e., the total surplus to society). (D) Calculate the difference in social welfare between the market outcome and the one that maximizes social welfare.

8. Consider the situation where there is a negative externality associated with the production of a good whose consumption generates marginal benefits: MB-100-2Q. The marginal private cost of producing this good is MCp=10+Q. Marginal external costs are constant; in particular each unit produced causes an additional $30 in external costs. (A) Identify the market outcome (Po. Qo), assuming the externality is ignored. (B) What are the marginal costs as seen by society? (C) Identify the outcome (P. Q1) that maximizes social welfare (i.e., the total surplus to society). (D) Calculate the difference in social welfare between the market outcome and the one that maximizes social welfare.

ECON MICRO

5th Edition

ISBN:9781337000536

Author:William A. McEachern

Publisher:William A. McEachern

Chapter17: Externalities And The Environment

Section: Chapter Questions

Problem 2.3P: (Negative Externalities) Suppose you wish to reduce a negative externality by imposing a tax on the...

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