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    Socially Efficient Price and Quantity of the Good

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    1. Demand for the product is Q = 50-1/2pe
    2. Supply is determined by the equation Q = -20+2pe
    a. What is the equilibrium price and quantity of the good in a perfectly competitive market?
    b. No imagine that consumption of each unit of the good creates 20 dollars in externality. Illustrate the social welfare loss associated with this externality and identify it on a graph
    c. What is the amount of social welfare lost
    d. What is the socially efficient price and quantity of the good which should be supplied?
    e. What could a community do about this situation? How might it control consumption of the good to limit the external costs?

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    Solution Preview

    1. Demand for the product is Q = 50-1/2pe
    2. Supply is determined by the equation Q = -20+2pe

    a. What is the equilibruim price and quantity of the good in a perfectly competitive market?
    Solve for the equations system:
    Q = 50-1/2 pe = -20+2 pe
    70 = 5/2 Pe
    Pe = 70*2/5 = 28
    Q= 50-1/2 * 28 = 36

    b. Now imagine that consumption of each unit of the good creates 20 dollars in externality. Illustrate the social welfare loss associated with this ...

    Solution Summary

    What is the socially efficient price and quantity of the good which should be supplied is determined. The equilibrium price and quantity of the good in a perfectly competitive market is examined.

    $2.19