Question

Externalities I

Perhaps ironically, air conditioners produce heat as a waste product (to say nothing of any externalities from energy consumption). Air conditioner’s waste warm up nearby outdoor areas. This effect can be substantial in dense cities. Suppose that the following are the benefits/ costs from running an air conditioner on a 90 degree day (Q is the temperature reduction enjoyed by the consumer of the air conditioning):

MPB=MSB=30-Q

MPC=10

External Cost=5

a) Graph the private/social marginal benefit/cost curves described above.

b) Determine the market equilibrium consumption of Q.

c) Determine the socially optimal consumption level of Q.

d) Calculate the consumer/producer surplus in b) and c). Calculate the deadweight loss in each, if applicable.

e) What is the deal with producer surplus?

f) Determine the tax that will yield the socially optimal consumption level. What is the revenue generated by the tax?

Answer 1