An environmental economic consulting firm is hired to measure the negative externalities associated with the pollution from an industry. The consultants calculate the marginal social cost of production to be $\mathrm { MSC } = 2 \mathrm { Q } + 30$ and the marginal private cost of production to be $M P C = Q$ $+ 30$. The market demand curve can be expressed as $P = 60 - Q$. The sum of the consumer surplus plus producer surplus at the market equilibrium (i.e. the equilibrium where production decisions do not take into account the externality) is:

Question

Quizplus · Accepted Answer

To find the market equilibrium without considering the externality, we set the market demand equal to the marginal private cost (MPC), because this is the condition under which the market operates when externalities are not internalized. So, we solve for $Q$ in the equation $60 - Q = Q + 30$. Simplifying, we get $30 = 2Q$, so $Q = 15$. The equilibrium price ($P$) can then be found by substituting $Q = 15$ into the demand equation, yielding $P = 60 - 15 = 45$. The consumer surplus is the area of the triangle above the price level and below the demand curve, which is $\frac{1}{2} \times 15 \times (60 - 45) = \frac{1}{2} \times 15 \times 15 = 112.5$. The producer surplus is the area below the price level and above the supply curve (MPC), which is also a triangle with the same dimensions, so it is also $112.5$. Adding these together, the total surplus is $112.5 + 112.5 = 225$.

An Environmental Economic Consulting Firm Is Hired to Measure the Negative