Compute the monetary value of the deadweight social loss

Reference no: EM13236333

Externalities-analysis and policy design: Suppose that in a competitive market, demand is given by the equation P = 600 - Q, and supply is given by the equation P = 160 + Q, where P is price and Q is quantity of some good or service. Production of each unit of output Q leads to a marginal external cost of $50, caused by pollutants emitted by the production of Q. If we add this marginal external cost to the market information, the equation for the social-cost supply curve is given by P = 210 + Q.

a. Compute the unregulated market level of output and price as well as the socially efficient level. By how much does the market output exceed the socially efficient output, and by how much is the market price below the socially efficient price?

b. Compute the monetary value of the deadweight social loss from the market failure that occurs if society lets firms to continue to produce negative externalities without regulation

c. Suppose a tax per unit output (per-unit tax) is imposed on the production of Q with the intent of making equal the market level of output and the socially efficient level. How high should that per-unit tax be? What is the gain in net social benefits (consumer plus producer surplus) that results from this per-unit tax?

Reference no: EM13236333

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