Beer production by Magic Hat involves generation of wastewater that can pollute local streams, if left unregulated by the government. This wastewater then causes damages to society in the form of reduced amenity value of Lake Champlain. The following represent the marginal private benefit, marginal private cost and marginal externality cost of beer production (assume there is no externality benefit)

MPB =360-12Q

MPC =180+6Q

MEC =18

where Q stands for quantity of beer (in terms of number of cases, in thousand)

P stands for price per case

1. Solve for the competitive market equilibrium price of beer and competitive market equilibrium quantity of beer (State the condition for competitive equilibrium and then proceed with showing show all your computations)

2. Solve for the efficient price of beer and efficient quantity of beer (State the condition for efficiency and then proceed with showing show all your computations)

3. Draw the MPB, MPC, MEC and the resulting MSC in a graph. Label all intercepts (vertical and horizontal intercept) accurately. Label also and all competitive and efficient equilibrium prices and quantities form your solutions above. The correct labels will help you answer the next set of questions

4. Label the following concepts in your graph:

i. CS and PS at competitive market at equilibrium (CS_C PS_c)

ii. CS and PS at efficient solution (CS_E PS_E)

iii. Total environmental damage (total externality costs) at efficient solution (TEC_E

5. Calculate the deadweight loss under competitive equilibrium (3), and then indicate it on the graph

Answer rating: 100% (QA)

1 To find the competitive market equilibrium price and quantity we set the marginal private benefit MPB equal to the marginal private cost MPC 360 12Q ... View the full answer