1. suppose you work as a research economist at the EPA. Two firms operate in a perfectly competitive market. This implies that each has the same marginal benefit curve, which in this case is horizontal at MB= $100. Each of the firms, however, has a different marginal private cost schedule
MPC1=20+Q and MPC2=30+2Q
Each firm's production process creates externalities that are valued by society at $10 per unit output
a) show that without government intervention, the firms' profit-maximizing outputs are Q=80 for firm 1 and Q=35 for firm 2, and the market is $100
b) Now calculate that socially optimal level of output for each firm
c) your boss knows that the firms are currently producing too much output a simply decides that all firms should cut their output by 15%. Show that this is an inefficient solution to this externality problem
2. Suppose a new submarine for the Navy costs $10 billion. Half the population (130 million people) are willing to pay $100 each to have it, and the other half are willing to pay $30 each not to have it. Should it be built?
1. suppose you work as a research economist at the EPA. Two firms operate in a perfectly competitive market. This implies that each has the same marginal benefit curve, which in this case is horizontal at MB= $100. Each of the firms, however, has a different marginal private cost schedule
MPC1=20+Q and MPC2=30+2Q
Each firm's production process creates externalities that are valued by society at $10 per unit output
a) show that without government intervention, the firms' profit-maximizing outputs are Q=80 for firm 1 and Q=35 for firm 2, and the market is $100
b) Now calculate that socially optimal level of output for each firm
c) your boss knows that the firms are currently producing too much output a simply decides that all firms should cut their output by 15%. Show that this is an inefficient solution to this externality problem
2. Suppose a new submarine for the Navy costs $10 billion. Half the population (130 million people) are willing to pay $100 each to have it, and the other half are willing to pay $30 each not to have it. Should it be built?
