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QD=40-2P and QS=P-8 represent market demand and supply functions for a good. If each unit of...

QD=40-2P and QS=P-8 represent market demand and supply functions for a good. If each unit of the good produced involves external costs of $4 (i.e. MEC=4), then
(a) what amount of good is produced in the market equilibrium?
(b) what are marginal social benefits(MSB) and marginal social costs (MSC) at the market equilibrium quantity?

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Homework Answers

Answer #1

17. Qd= 40-2P

Qs= P-8

(a) At market equilibrium quantity : Demand equals supply which means marginal social benefit equals marginal private cost.

40-2P= P-8

48= 3P

P= $16 (Market equilibrium price)

Q= 16-8

Q= 8 units (Market equilibrium quantity)

(b) Marginal external cost = $4

Then , Qs = P-8-4

Qs = P-12 (Marginal social cost curve)

Market equilibrium quantity = 8 units

Marginal social benefit : Qd= 40-2P

8 = 40-2P

2P= 32

P= $16 (Marginal social benefit at market equilibrium quantity)

Marginal social cost : Qs= P-12

8= P-12

P= $20 (Marginal social cost at market equilibrium quantity)

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