Jill sells bouquets of flowers that she grows in her backyard. Jill's marginal cost of producing bouquets is given by MC = 0.25Q, where Q is the number of bouquets she makes. Jill can sell all the bouquets she wishes at the local farmers' market for $6 per bouquet. Unfortunately, Jill's floriculture aggravates the allergies of her next-door neighbor, Cooper: Every bouquet that Jill grows produces 50 cents' worth of sneezes.
Externalities and Public Goods 16
a. Jill wants to maximize her profit. Determine the profit-maximizing quantity of bouquets.
b. Assume that Jill produces the quantity of bouquets you determined in (a). Add up the cost of the last bouquet to Jill and the cost that bouquet imposes on Cooper, and compare your answer to the $6 worth of benefit the last bouquet creates for the buyer. Is producing the last bouquet a good thing for society?
c. From society's standpoint, is Jill overproducing or underproducing bouquets?
d. Suppose that Jill marries Cooper. Determine the social marginal cost of producing bouquets by adding the 50 cents' worth of damage each bouquet causes Cooper to Jill's private marginal cost. Express your answer as an equation.
e. Determine how many bouquets Jill should produce if she fully considers the costs she imposes on her new husband. Explain why it makes a difference if Cooper is just a neighbor or is Jill's husband.