A group of college students rent a house in a local neighborhood. They throw frequent rowdy beer-drinking parties and disturb the neighbors. The marginal external cost is a function of the number of cases of beer consumed at the party.
Model the market for beer based on the following supply and demand equations.
Price = dollars per case
Quantity = cases of beer
MEC = $1.50/case
This is a model of a negative externality.
This is a model of an externality in consumption.
What is the value of the market equilibrium quantity? 14 units
What is the value of the socially optimal equilibrium quantity? 5.6 units
Please help with these others 1-7
market equilibrium price, demand = supply
30 - 2P = 2P -2
4P = 32
P = 8
Q = 14
socially optimal equilibrium price, MEC shall be incorporated in
supply function
Supply: P = 0.5Qs + 1
Social Supply: P = (1.5+0.5)Qs + 1
30 - 2P = 0.5P - 0.5
2.5P = 30.5
P = 12.2
Q = 5.6
total surplus for market equilibrium
Consumer surplus = (15-8)*14
Producer surplus = (8-1)*14
Total surplus = (15-8)*14+ (8-1)*14 = 196
socially optimal equilibrium
Consumer surplus = (15-12.2)*5.6
Producer surplus = (12.2-1)*5.6
Total surplus = (15-12.2)*5.6+(12.2-1)*5.6 = 78.4
Difference = 196-78.4 = 117.6
Externality at the market equilibrium = 1.5*14 = 21
at Q=14, P = (1.5+0.5)*14 + 1 = 29
Deadweight loss = (29-12.2)*14*0.5 = 117.6
A group of college students rent a house in a local neighborhood. They throw frequent rowdy...
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