ProblemSet4Solutions - Instructor: Justin Krieg Econ 251...

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Econ 251 – Problem Set 4 Question #1 Consider a number of factories who faces the demand curve given by 50 d P Q = . The factories produce a good that requires heavy manufacturing techniques, requiring disposal of hazardous materials. Currently, the factories dump these materials on a nearby piece of land, which is not currently owned by anyone. The marginal external damage incurred by this action is equal to 2Q and falls upon the citizens of the city in which the factories operate. The factories incur a marginal cost of production given by the following equation: 10 MC Q = + . Note: Be sure to use graphs in your answers below . a. Find the market equilibrium quantity and price when the factories does not account for the external damages. b. What is the socially optimal quantity and price for the market? c. Find the value of dead weight loss from the firm’s choice in part a. d. Find the per unit Pigovian tax that induces the socially optimal quantity and price. Show graphically that this tax will yield the socially optimal quantity and price. 1. a. For a market that doesn’t take into account the marginal external damage, the market equilibrium will be where demand equals supply (or in this case where demand (set equal to price) is equal to marginal cost. * * 50
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This note was uploaded on 02/06/2012 for the course ECON 251 taught by Professor Blanchard during the Summer '08 term at Purdue University-West Lafayette.

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ProblemSet4Solutions - Instructor: Justin Krieg Econ 251...

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