Amityville has a competitive chocolate industry with the (inverse) supply curve Ps = 440 + Q. While the market demand for chocolate is Pd = 1200 - Q, there are external benefits that the citizens of Amityville derive from having a chocolate odor wafting through town. The marginal external benefit schedule is MEB = 6 - 0.05Q.
a) Without government intervention, what would be the equilibrium amount of chocolate produced? What is the socially optimal amount of chocolate production?
b) If the government of Amityville used a subsidy of $S per unit to encourage the optimal amount of chocolate production, what level should that subsidy be?