Given a MC function and a MB funtion for a good (e.g., MC = 10 + Q, MB = 5 - Q ,how do we derive an efficient allocation for the good? What if we add a per-unit externality (e.g., set to some constant =5 per unit emissions from production)

Given a MC function and a MB funtion for a good (e.g., MC = 10 + Q, MB = 5 - Q ,how do we derive an efficient allocation for the good? What if we add a per-unit externality (e.g., set to some constant =5 per unit emissions from production)

Micro Economics For Today

10th Edition

ISBN:9781337613064

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter4: Markets In Action

Section: Chapter Questions

Problem 8SQP

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Market Failure Analysis

To understand Market failure, we need to first understand welfare economics. An Italian economist, Vilfredo Pareto stated that allocation of resources in an efficient manner such that an economic change, which harms no one and makes someone better off, indicates an increase in social welfare. It is also called Pareto Optimality, where resources cannot further be reallocated without harming one. This does not apply to those economic changes, which harm some and benefit others. social welfare increases if the utility of any of its members' increases and none decrease in the economy.

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Step 2: Calculate the efficient level.

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Step 3: Calculate the efficient level after the externality.

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