Suppose we are examining a project with calculated marginal private benefits of $(100−2q) and marginal private costs of $(10 + 4q), where q represents the amount of a resource to be extracted or produced. There are also external costs of $6 added for each unit of q extracted (i.e., there’s a constant marginal external cost). Assume that we are dealing with a static “world” here.
(a) If this resource is allocated via a market that does not take external costs into account, find the amount of q that will be produced and the resulting market price. Then find the efficient amount of q. Is the market price “too high” or “too low?”
(b) Determine the value of the loss in efficiency due to the misallocation via the market. Hint: this is analogous to calculating differences in total surplus in a supply and demand framework.