Question: Suppose demand is Q D = 16 - P supply is Q S = P . There is a constant positive externality of $4 per

  1. Suppose demand is QD = 16 - P supply is QS = P. There is a constant positive externality of $4 per unit (Marginal External Benefit, MEB = $4).  

a. Draw the graph of the MC, MB and MSB curves.  Identify the level of the intercepts.

b. Calculate total surplus if the market is at the point where MC=MB.

c. What is the DWL loss at this point (MC=MB)?  Identify on your graph.

d. Calculate total surplus if the market is at the point where MC=MSB.

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