Encourage the optimal price of chocolate production

Reference no: EM1337159

Optimal amount of chocolate production

Amityville has a competitive chocolate industry with the (inverse) supply curve
Ps =440+Q. While the market demand for chocolate is Pd=1200-Q, there are external benefits that the citizens of Amityville derive from having a chocolate odor wafting through town. The marginal external benefit schedule is MEB =6-0.05 Q.
a) Without government intervention, what would be the equilibrium amount of chocolate produced? What is the socially optimal amount of chocolate production?
b) If the government of Amityville used a subsidy of $S per unit to encourage the optimal amount of chocolate production, what level should that subsidy be?

Reference no: EM1337159

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