The production of good Z creates an externality. The following questions are based on the graph below, which shows the marginal
revenue, marginal social benefit, marginal private costs, and marginal social cost associated with the production of good Z.
(a) Is the externality positive or negative? Explain.
(b) Using labeling from the graph above, identify the socially optimum output. Explain how you determined your answer.
(c) Suppose that good Z is produced by a profit-maximizing monopoly. Answer each of the following.
(i) Using labeling from the graph, identify the unregulated firm’s output. Explain how you determined your answer.
(ii) To produce the socially optimum output, indicate whether the government should tax or subsidize the firm.
(iii) Calculate the dollar value of the needed per-unit tax or subsidy.
(d) Suppose that good Z is produced in a perfectly competitive industry. Answer each of the following.
(i) Using labeling from the graph, identify equilibrium output in the absence of regulation. Explain how you determined your answer.
(ii) To produce the socially optimum output, indicate whether the government should tax or subsidize the firms in the industry.
(iii) Calculate the dollar value of the needed per-unit tax or subsidy.
(a) Is the externality positive or negative? Explain.
(b) Using labeling from the graph above, identify the socially optimum output. Explain how you determined your answer.
(c) Suppose that good Z is produced by a profit-maximizing monopoly. Answer each of the following.
(i) Using labeling from the graph, identify the unregulated firm’s output. Explain how you determined your answer.
(ii) To produce the socially optimum output, indicate whether the government should tax or subsidize the firm.
(iii) Calculate the dollar value of the needed per-unit tax or subsidy.
(d) Suppose that good Z is produced in a perfectly competitive industry. Answer each of the following.
(i) Using labeling from the graph, identify equilibrium output in the absence of regulation. Explain how you determined your answer.
(ii) To produce the socially optimum output, indicate whether the government should tax or subsidize the firms in the industry.
(iii) Calculate the dollar value of the needed per-unit tax or subsidy.
1 answer:
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