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Market equilibrium vs. efficient level of production with an externality. Suppose the demand and supply for cars given by:
Demand: P = 120 - 5q
Supply: P = 30 + q
(a) Graph the initial equilibrium, being careful to label axes and intercepts.
(b) What are the market equilibrium price and quantity of cars?
(c) Supper there is an externality from selling cars that inflicts MD = 6Qq. What is the social marginal cost (SMC) of another car? Add the SMC to the graph and find the efficient number of cars.
(d) Label CS, PS, and DWL at the market equilibrium
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