Suppose the demand (i.e. the private marginal benefit) for industrial grade stink bombs is given by P=300-2Q and supply (i.e. the private marginal cost) for is given by P=Q. Also, suppose that the marginal external damage of consuming this product is $60 per stink bomb.

a. What is the equilibrium quantity of stink bombs sold and consumed?

b. What is the socially optimal equilibrium quantity of stink bombs sold and consumed?

c. Considering your answers to (a) and (b), are stink bombs over or under consumed in the free market relative to the social optimal amount? Why?

d. Calculate the deadweight loss associated with the externality.

e. To eliminate the deadweight loss, would the government need to impose a corrective tax or subsidy on stink bombs? What should the magnitude of that tax/subsidy be?

GRAPH AND EXPLAIN! (I understand A and C mainly just need the graphs and math on how to find the rest)

Answer rating: 100% (QA)

Here Demand P 300 2Q Supply P Q Marginal external damage 60 per stink bomb a The Equilibrium quantit... View the full answer