Question

3) Assume that the market for energy efficient window installations in San Diego is perfectly competitive. Quarterly inverse supply and inverse demand are: P 1200 3Q (Private MB) P 440Qs (Private MC) neighbors (lowering the overall price of electricity, reducing pollution, and so on) These external benefits to consumers are estimated to be EMB 2Q (the more windows installed, the more external benefit to installing more windows). a) Find the equilibrium price and quantity that will be produced in a competitive market. Find the socially optimal price and quantity. Calculate a Social MB curve that includes the private benefits (i.e. the demand curve) as well as the external marginal benefits. b) Draw a graph that includes the supply curve, the demand curve, and the social marginal benefit curve. Label the market equilibrium, as well as the social optimum. Using letters to label the various areas of this graph, and write expressions for the consumer surplus, producer surplus, and external benefits based on the market outcome. For example, CS-A+B+C. Based on your labels, which area represents the external benefit generated at the market outcome? c) Comparing the market outcome and the socially optimal outcome, which areas describe deadweight loss? Calculate a dollar value for this deadweight loss Explain why there is deadweight loss in this marke. d) Briefly discuss a government intervention that could improve social welfare in this market. What's the rationale behind your policy?

Answer 1

Page No 8oo-30 440+9 160 48, p 190, pr = 440+190 80 630 Pv pro-SHB-39t8G- Nou at Sodial optimum , 1 o at&m 800-6 440+8 160-S (8268-190) )Now deado due dead uot legs exisk due to last esial Maginal Ben to loco Lovel at Mkt &m unit-8 By: exe nal ben Gout gntPr vention, foo ide R (Margina) at social optimum Leve a this uu Seduoe feence Mose uDd uo ocally optmal lovel uio take plone

Graph

PMC 80 63018 140 SMB 60 SMC 200 38 o \ 44 o