Question

Q#3: Externalities
The Demand curve for parking lots is given by P=1000-Q.The supply of parking spots in a city is associated with increasing external costs. While the private supply curve is given by P=Q (where P denotes price and Q quantity), the social supply curve is P=2Q. Now assume the city imposes a Pigou Tax on the supply. Calculate the remaining deadweight loss. Rounded up or down to the next closest integer. (2 pts)

Answer 1

Above are the given curves plotted.

Intersecting point for

P = 1000 - Q, and P = 2Q

is, Q = 1000/3, P= 2000/3

Point A is (1000/3,2000/3)

Point B is when Q = 1000/3 on line P=Q,

B is (1000/3, 1000/3)

Point C is P=1000-Q and P=Q

C is (500,500)

Area of ABC is Dead weight loss

1/2*Base*height

=1/2*AB*(height)

=1/2*(2000/3-1000/3)*(500-1000/3)

=1/2*1000/3*500/3

=27777.78

Rounding off

Answer is 27778