Question:
Q1. Consider a market where demand is p=10-2Q and supply is p=Q/2. There is a consumption positive externality of $2.50/unit of consumption.
Calculate the market equilibrium.
Calculate the total surplus (the sum of producer and consumer surplus).
How can government increase the total surplus?
Impose the program you indicated in part C and calculate the total surplus.
Q2. Consider a market where demand is p=10-2Q. There is a negative production externality of $2.50/unit of consumption. Supply is equal to p=Q/2.
What is the market equilibrium?
What is the social optimum quantity and price?
If the government uses a tax to get producers to internalize the externality what is the nest price received by producers?
Calculate the total surplus at the market equilibrium.
Calculate the total surplus at the Social optimum and with the tax.