1 What is the social cost of the last unit traded in the market?
2 Which quantity is socially optimal (i.e. what is the efficient quantity)?
3 What is the deadweight loss generated by the externality?
Homework Answers
1) The social cost traded in the market for the last unit is $P4
2) Socially optimal quantity is Q2
3) DWL= 1/2*(P4-P2)*(Q3-Q2)
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