Assume market demand characterized by MPB(Q)=168-2Q (MPB=marginal private benefit, and is the same as the price in the demand function), and market supply characterized by MPC(Q)=12+2Q (MPC is the marginal private cost and is the same as the price in the supply curve function). Further, assume a negative externality equal to $24 per unit transacted.

a. Given the negative externality, write out the MSC (marginal social cost) equation. b. Solve for the equilibrium quantity transacted in a market without interventions, as well as the efficient (socially optimal) quantity. Hint: You may want to use the MSC equation you wrote out in part (a) to find the socially optimal quantity

C. In an appropriately labelled graph, clearly identify the deadweight loss resulting from a market without interventions.

d. Calculate the deadweight loss resulting from a market without interventions. e. Consider using a Pigouvian tax to maximize total surplus. What would the tax be? f. Explain how a tax increases total surplus (in this context) despite decreasing consumer and producer surplus according to our usual definitions.

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SOLUTION a The marginal social cost MSC equation is MSCQ MPBQ 24 where 24 is the negative externalit... View the full answer