Firm A is producing exercise equipment. The supply curve is described by the following equation: P=10+Q. The demand curve for the equipment is: P=100-2Q. Production of each unit of equipment creates marginal external benefits (MEB) to other consumers through lower medical insurance premiums, MEB=1Q.
a) What is the market level of production of this exercise equipment?
b) What is the socially optimal level of production of this exercise equipment?
c) Compare your answers to question (a) and (b), explain the intuition behind the results.
d) How can the government help to solve the externality problem?