The market for social games on Facebook is perfectly competitive. The demand curve for games published is given by Q=400-4P, where P is the price users pay per game. The marginal cost of producing each game is constant at $5. In addition, all published games advertise through postings on Facebook, which bother many non-gamers in Facebook. The marginal cost that social games impose on non-gamers in Facebook is given by MEC=0.25Q, but game publishers could not care less about bothering non-gamers.
(a) What is the equilibrium number of social games published?
(b) What would be socially optimal number of social games on Facebook?
(c) Suggest a policy the government can impose that would achieve the efficient number of social games on Facebook and raise revenue for the government. Be precise.
(d) Calculate the revenue the government would earn under the policy you suggested in (c).
Institutional Venture Partners, an investor in Web companies, raised several funds for Zynga Inc. With this fund, Zynga merged and acquired all social games in Facebook and became a monopolist. Assume everything else is the same.
(e) What is Zynga's profit-maximizing number of games to be published?
(f) What is the total amount of the externality at Zynga's profit-maximizing quantity?
(g) What is the socially optimal quantity of games to be published?
(h) Draw a graph of this situation. Label the profit-maximizing and efficient quantities.