Question

Consider a competitive (C) market for ‘hamburger combos’ (hamburger, fries, and
a drink) at a fast food restaurant with the following aggregate demand (PD) and
aggregate supply (PS) relationships:
PD = 30 − 0.5QD
PS = 10 + 0.5QS
a)Suppose that a negative pollution externality in ‘hamburger combos’ exists result-
ing from the health damages of air pollution produced in the production process.
Calculate the socially efficient equilibrium price (P
∗
) and output (Q∗
) given that
the socially efficient demand (MWTP) and supply (MSC) for ’hamburger combos’
is as follows:
MW T P = 30 − 0.5QD
MSC = 20 + 0.5QS
b) Graph your results from part (a) in a new Demand/Supply diagram and show the
total social benefits (willingness to pay) and costs from the socially efficient price
and output (identify these areas in your diagram using A, B, C, etc.). Calculate
and explain the net social value in the socially efficient equilibrium. Show your
calculations