QUESTION: Externalities and Public Goods

Part I

Suppose that in the market for paper, demand is P=100 - Q. The marginal private cost of producing paper is 10 + Q. However, pollution generated by the production process creates a per unit external harm (i.e., negative externality) equal to 0.5Q (i.e., the level of the externality increases with the quantity produced).

1. What is the (unregulated) market equilibrium and quantity if the externality is not corrected for in this market?
2. What is the socially optimal quantity of paper that should be produced?
3. Suppose that the government wants to achieve the socially optimal quantity by taxing producers. What should the tax per unit of paper be? (Hint: see the graph below.
   Be reminded that the tax on producers will cause a parallel shift in the supply curve by the amount of tax. The government can impose a tax so that after tax market equilibrium coincides with the equilibrium you obtained in part (b). To obtain the vertical difference between the new and old private cost curves, notice that the value of the new private cost with tax at Q = 36 is 64. The value of the old private cost at Q = 36 is 46 (Plug Q = 36 into the original private cost function; P = 10 + (36) = 46).
   
   Part II
   Consider an economy with two consumers, Ben and Joe. There are public goods in this economy in the form of tornado sirens?. Ben’s demand for tornado sirens is given by P = 10 - Q, and Joe’s demand for tornado sirens is P = 8 - 2Q. Marginal cost for providing tornado sirens in the markets is constant, MC = 9.
4. Which two properties must be satisfied for sirens to be public goods?
5. Are tornado sirens non-rivaled?? Explain your answer.
6. Are tornado sirens non-excludable? Explain your answer.
7. Is there a potential for free-rider problem?
8. Derive market demand curve for sirens.
   (Hint: the graphs below will help you to answer h-j ).
   
9. How many sirens will be provided in this market?
10. What will the price for these sirens be?
11. Is the result from previous questions? realistic? Discuss how government funds public goods.

Price: $2.99

Solution: The downloadable solution consists of 5 pages
Deliverable: Word Document