Midterm 1 solutions

B 2 points what is the total social surplus at q total

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Unformatted text preview: What is the total social surplus at Q*? Total social surplus is the area between SMB and SMC, which is A+B+G. This is equal to [CS] + [PS] - [environmental damage] = [A] + [B+C+G+H+R] - [R+T]. c. (2 points) Now consider a ban on production of Q (moving from QM to Q=0). What is the total environmental benefit of this ban? Total environmental benefit is the area under the MD curve between Q=0 and Qm , which is R+T+U. d. (2 points) Describe in a sentence why it can help producers (for example in the setting above) to have an environmental regulation that forces them to reduce production from QM to Q*. When production is restricted to Q*, producers get to charge a higher price of P* (P*>Pm). This could lead to new producer surplus being higher under the regulation than under the free market outcome. Specificall...
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This note was uploaded on 01/31/2014 for the course BILD 3 taught by Professor Wills during the Winter '07 term at UCSD.

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