Question

Consider the following hypothetical model of the market for municipal solid waste (MSW) services in the town of Stonington, Connecticut: MPB = 30 − 2.5Q MEB = 0 MPC = 6 + 0.5Q MEC = 0.2Q where Q is the number of trash containers per household per month.

a. Assume that Stonington uses a flat fee pricing system for trash services. Under this scenario, find the flat fee equilibrium quantity (QFF).

b. Compare the flat fee equilibrium to the competitive equilibrium (QC) and the efficient equilibrium (QE).

Answer 1

a. In the hypothetical model of the market for MSW services, a flat fee pricing system for trash services implies zero marginal private cost.

Hence, the equilibrium occurs where the marginal private benefit intersects the quantity axis.

This implies MPB = 0

= 30 − 2.5Q = 0.

Q = 12

Therefore, the flat fee equilibrium quantity QFF = 12 trash containers per household per month.

b. Competitive equilibrium Qc where MPB = MPC

30 - 2.5Q = 6 + 0.5Q

24 = 3Q

Qc = 8

Efficient equilibrium QE, where MPB = MPC + MEC

30 - 2.5Q = 6 + 0.5Q + 0.2Q

24 = 3.2Q

QE = 7.5

In comparison to the flat fee equilibrium, competitive equilibrium Qc And QE both are less than QFF