What is the socially optimal amount of chocolate production

Reference no: EM131253700

Amityville has a competitive chocolate industry with the (inverse) supply curve P^s = 440 + Q. While the market demand for chocolate is P^d = 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 ME_B = 6 - 0.05Q.

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: EM131253700

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