Specify both the type of policy and its magnitude

Reference no: EM131335414

In Paris, hundreds of small bakeries produce bread for sale to their customers at a marginal cost of MC = 2 + 0.1Q. The inverse demand for bread is given by P = 10 - 0.1Q, where P is in euros per loaf and Q is loaves per hour. The baking of bread also creates a positive externality: There is nothing quite like the smell of fresh-baked bread. Tourists and residents receive external marginal benefits given by EMB = 2 - 0.02Q.

a. Find the quantity of bread produced in Paris in the absence of any government intervention.

b. To achieve the socially optimal output, government can use a price-based intervention. Determine the ideal measure for government to use to achieve this goal. Specify both the type of policy and its magnitude.

Reference no: EM131335414

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