Question

2)Consider the following supply and demand schedule for steel.. Pa 100-4Qd a. Calculate the market equilibrium price and quantity for steel. (4pts)- Answer: 100-4Q-9+3Q Q-13 Quantity-13. P-48 Pricw b. Pollution from steel production is estimated to create an external cost of $14 per ton. Show the demand and supply schedule graphically and identify the external cost curve, market equilibrium, deadweight loss, and social optimum quantity. (4pts)- c. Assume there is no intervention in this market. Calculate consumer surplus and producer surplus. (4pts) d. Suppose the government is considering implementing a tax on steel production. If the government decides to implement a per-unit tax. what should it be? Why? (2pts)- e. Assume the tax is put in place, Calculate the consumer surplus, prod surplus and government tax revenue. (4pts)-

Answer 1

[a] we have, P_d = 100 - 4Q_d P_s = 9 + 3 Q_s The market equilibrium price and quantity for steel would be: P_d = P_s 100 - 4 Q_d = 9 + 3 Q_s therefore equilibrium price = 48 and equilibrium quantity = 13 [b] The new P_s schedule would be: P_s = 23 + 3 Q_s [After considering external cost of $14 per ten] Now, equilibrium price and quantity is: P_s = P_d 23 + 3 Q_s = 100 - 4 Q_d equilibrium quantity = 11 and price = 56 Now, we graphically show demand and supply schedule and identify the external cost curve, market equilibrium, dead weight loss and social \r\n optimum quantity where, e_1 = market equilibrium before external cost. E_2 = market equilibrium after external cost doublerightarrow deadweight loss = 1/2 times (13 - 11) times (56 - 42) DWL = 14 doublerightarrow social optimum quantity = 11 and social optimum price = 56