Part I: Negative Externalities Consider the market for a specific fruit product (GrapplesTM) where the demand is given by: QD = 10,000 - 400P The inverse supply (i.e. "Private Marginal Cost") is: PMC = 5 0.0075Q The production of Grapples uses large amounts of fertilizer which results in runoff and damage to the water in adjacent rivers and streams. The marginal cost of this pollution is given by the Marginal External Cost equation: MEC = 0.0025Q Grapple producers are not liable for these harms and so ignore them in their production decisions.

Find the competitive equilibrium Quantity of Grapples.

Find the competitive equilibrium Price of Grapples.

Find the Consumer Surplus in equilibrium

Find the Producer Surplus in equilibrium

What is the total external cost in equilibrium?

Hint: Thetotal external cost is the area below themarginal external cost curve.

When accounting for the external cost, what is the efficient quantity of output in the market?

What is the Deadweight Loss created by the externality?

In order to reduce pollution, the government decides to tax Grapple growers. The tax is set as a per-unit (per Grapple) amount.

What tax per grapple will result in the efficient outcome?

Suppose that the government doesn't impose a tax on the market. Instead, the government allows a monopoly to form. The monopoly has the same private marginal cost as the market supply given earlier.

How many Grapples would a monopoly produce?