Regulating perfect competition with externalities
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1.A firm is producing output in a competitive market, where demand is
P = 24 - 2Q
The marginal private cost of production is equal to $4 and the marginal social cost is $2. Explain the nature of the market failure and derive the Pareto optimal level of output. How could the Government ensure that the market produced the optimal level?
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Solution Summary
This solution explains how the government should respond to ensure that public costs of production re taken into consideration when production decisions are made.
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