Question

Question 9: Suppose that in the eastern suburbs of Sydney, the demand for plants is given by P = 48- Q, and supply is given by P = 0.2Q, where Q represents thousands of plants. Because people enjoy seeing plants as they pass by others' houses, these plants produce a positive externality. Suppose that each plant produces a marginal external benefit equal to $12.

a) What will be the market price and the quantity supplied of these plants?

b) What is the socially optimal number of plants?

c) Calculate the Deadweight Loss associated with the market outcome.

d) How would you suggest that the government corrects this inefficiency caused by the Externality.

Answer 1