[<< search more Soustons | Found Errors in Solution? >> Report h Answer (2) In equilibrium, market demand equals market supply. 100 - 0.005Q = 10 + 0.01Q 0.015Q = 90 Q= 6,000 P = 10 + (0.01 x 6,000) = 10 + 60 = $70 (b) In new equilibrium, 100 - 0,005Q = 30 + 0.01Q 0.015Q = 70 Q = 4,667 P = 30 + (0.01 x 4,667) = 30 + 47 = $77 © Amount by which quantity is too large = 6,000 - 4,667 = 1,333 ‘Amount by which rice is too low = $7 - $70 = $7 Per-unit external cost = 30 + 0.01Q - 10 - 0.01Q = $20 Total external cost = $20 x 4,667 = $93,340 Deadweight loss = (1/2) x Difference in price x Difference in quantity = (1/2) x $(77 - 70) x (6,000 - 4,667) = (1/2) x $7 x 1,333 = $4,665.5, Resources are inefficiently allocated by way of increasing consumer surplus beyond social optimal and decreasing producer surplus beyond social optimal. (d) (1) Increase in marginal private cost by $10 will shift the supply curve upward by $10 for every output level and new supply function is: P-10= 10+0.01QP= 20+0.01Q Equating demand with new supply function: 100 - 0.005Q = 20 + 0.01Q 0.015Q = 80 Q = 5,333 P = 100 - (0.005 x 5,333) = 100 - 26.67 = $73.33 Total revenue with Pigouvian tax = 4,667 x $77 [From part (b)] = $359,359 Total revenue with expensive input = 5,333 x $73.33 = $391,069 Since total revenue is higher with expensive input, benefits of cleanup exceed the cost. (2) Increase in marginal private cost by $30 will shift the supply curve upward by $30 for every output level and new supply function is: P-30=10+0.01Q P=40+001Q Equating demand with new supply function 100 - 0.005Q = 40 + 0.01Q 0.015Q = 60 Q= 4,000 P = 100 - (0.005 x 4,000) = 100 - 20 = $80 Total revenue with Pigouvian tax = 4,667 x $77 [From part (b)] = $359,359 Total revenue with expensive input = 4,000 x $80 = $320,000 Since total revenue is lower with expensive input, benefits of cleanup do not exceed the cost. Likes: 0 Dislikes: 0